Retirement Planning For Small Business

on November 2, 2016

It is amazing to me how many entrepreneurs I meet when speaking at events and so forth who do not have a retirement plan in place. Now it may be that these folks simply don’t really plan on retiring (count me in there), but just as often – probably more often – it seems to be for lack of planning.

And actually, that is pretty understandable.

The fact is, unlike employees, who can get employer matching for 401(k)s, plan ahead for when best to utilize Social Security, and hopefully ride off into the sunset all organized and proper, small business owners have a different and unique set of challenges vis-à-vis retirement.

For starters, there is that business that you created. What are you going to do with it? Not only is it likely an entity with monetary value – maybe the main entity that will fund your retirement – but there is also the emotional attachment issue that comes with leaving one’s brainchild and life’s work behind.

And what are you going to live on? Again, for the entrepreneur, it is often more difficult to save for retirement. A recent survey I saw shows that almost half of all small business owners do not have a retirement plan in place (47%.)

We better change that!

Essentially, there are two main steps that any small business owner needs to consider when planning for retirement:

  • Create a retirement plan
  • Work on the business

Let’s drill down into those a little more deeply:

1. Set up a retirement plan: Getting into the habit of saving for retirement may not be easy but it is necessary. There are several types of retirement plans that a small business owner can utilize:

KEOGH Plans. A KEOGH retirement plan allows the self-employed and sole proprietors to contribute significant sums every year into a tax-free account (the amount varies). There are several benefits to starting a KEOGH plan:

  • Contributions are deducted from gross income
  • Taxes are deferred until the money is withdrawn
  • Interest earned is also tax deferred until withdrawn

Solo 401(k). If you are a little late to the retirement planning party, solo 401(k) plans are great because they offer high contribution limits. Currently, a solo 401(k) allows you to contribute up to $53,000 a year into your retirement account ($59,000 if you are 50 or over.)

An IRA: There are different Individual Retirement Accounts you may want to consider – A ROTH or a SEP – and you should speak with a financial adviser to see which is right for you.

2. Work on the business: The other real challenge for the entrepreneur has to do with the business itself. What are you going to do with it? Are you going to sell it, give it to your children, close it down, or what?

No matter what you decide, it would behoove you to get it as profitable as possible as you approach retirement. If you are going to cash out and sell it, obviously the more it is worth the more you will get. And if you want to give it to your children and take the tax benefits of that, you will want it to be as strong as possible too.

Here are the steps to take:

  • Spruce it up. Just as you would clean up your home before selling it, so too your small business
  • Get the finances in order: Get dead weight off the books, have your P&L updated, liquidate old assets.
  • Get a business valuation: A business broker can give you an honest evaluation of the value of your shop and also can help you sell it for top dollar if that is your goal. Either way, an impartial valuation will allow you to make better, more informed decisions.

Finally, let me strongly suggest that you see an estate-planning attorney. He or she can tie all of these loose ends together for you in a nice bow that will allow you to take the necessary steps to retire, sell assets, build that beach house, or even hop in the Winnebago with the grandkids if that’s your thing.