Financial planning for entrepreneurs/business owners is a bit different than planning for all of us who get paid by an employer. When you own your own business there is no retirement plan already set up for you that you just get to stash money away into. So if you’re an entrepreneur – this one is for you!
Savings options for the self-employed:
- Self-directed 401(k)
- You can open one with almost any investment bank and it works the same way as a regular one except you choose all your investment options and you’re the trustee for your own account. It’s important to create a good, well-diversified investment portfolio for yourself. This is a solid choice for business owners and their spouses who are able to set aside a significant portion of their earnings. With a solo 401(k), as an employee, you can stash away as much as $18,500 (for 2018). As the employer, you can contribute another 25% of compensation, up to a ceiling of $55,000 for 2018, including your employee contribution. If you’re 50 or older, you can toss in another $6,000 extra. Total savings: a whopping $61,000.
- SEP IRA (Simplified Employee Pension Individual Retirement Account)
- Simplified employee pension. You set this up for yourself and it’s great if you have a few employees too, as you can help them out a bit. You set up the plan with your investment bank and then you have your own account, which you can manage exactly like any other IRA account. The maximum contribution cannot exceed the lessor of 25% of total compensation or $55,000 for 2018. Compensation up to $270,000 in 2017 of an employee’s compensation may be considered. Contributions are pre-tax so this is a really easy way to save for retirement if you’re a one man show.
- Bonus: you don’t have to fund the account until you file your tax return.
- Defined Benefit Plan
- These cost a couple grand to set up usually but are SO worth it to reduce income especially as you get older. A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. Of course, if you’re setting this up for your self and you’re the only employee, it works wonders to reduce your income and help you save money for retirement, since you can set up all the rules. This is great for retirement planning and for tax planning.
- SIMPLE IRA
- A.K.A. a savings incentive match plan for employees. A SIMPLE IRA is designed specifically for small businesses and self-employed individuals. If you have a few employees, say, less than 10, who make more than $5,000, but far from six figures, and want to offer a plan for them as a perk, this is probably the one for you. It was designed for firms with no more than 100 employees.
- This one isn’t for moonlighters–you can’t contribute if you’ve already maxed out employee contributions to a 401(k) at your day job. Also, if you need to make a withdrawal from a SIMPLE IRA plan within two years of its inception, the 25% penalty is significantly higher than the 10% fee you’d be charged for early withdrawal from a SEP IRA.
Those are the basic ways you can save for retirement. I would generally advise seeking the council of a financial planner to help set all of these up. How you actually retire and leave the business is much trickier than saving for retirement.