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Retirement can be like a dark cloud for small businesses. Many people put their blood, sweat, and tears — and every penny — into building their business, but never put money aside for the future.
A large number of entrepreneurs have reported not putting aside any retirement savings at all. For some, selling the business is their only retirement plan.
It’s a risky bet, says Keith Hall, president and CEO of the National Association for the Self Employed.
“You put all your eggs in one basket. Not just your current lifestyle, but your future,” says Hall. “If something goes wrong, you sacrifice both.”
And the list of things that can go wrong is long: your business could fail. Your health can fail. You may not find a buyer. You may have to sell for less than you need. You may not be able to fully withdraw.
Rather than playing on when everything will be perfect, diversify your nest egg so that it will last well into your later years.
Prioritize retirement savings
According to Hall, saving for retirement is often the last item in your budget and the first thing to cut in favor of other priorities. Instead, make it just as important as paying off your mortgage or running your business.
This will not come naturally to most entrepreneurs, who often have a strong focus on immediate needs and plan three to five year increments.
“It’s hard to think about 20+ years as an entrepreneur and small business owner,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I often think about what I need to do today to make immediate money and long-term profitability.”
But Carlson, a financial advisor and certified financial planner, makes it a point to invest where she can. She and her husband contribute to a retirement plan provided by her employer. They put money into individual retirement accounts along with other investments.
“My biggest lesson was to start fresh, no matter how small the amount; It’s important to just start over,” she says.
Determine what you can afford, whether it’s 1%, 5%, or 10% of your gross income, and commit to it, says Hall. Over a long enough window of time, even small, regular contributions become valuable.
There are many small business retirement plans, each with their own requirements, conditions, and tax implications.
– Traditional Roth IRAs: Individual retirement accounts are easy to open and available to virtually anyone. You can donate up to $6,000 in 2022 (up to $7,000 if you are 50 or older). The main difference between a traditional and a Roth IRA is whether you want the tax savings now or later. Traditional IRAs use pre-tax income, but you pay taxes when the money is withdrawn. With Roth it’s the other way around.
– Solo 401(k): Available to business owners with no full-time employees (exception for spouses). The contribution limit for 2022 is up to $61,000, although it is split into two parts, each with a limit. Similar to employer-funded 401(k), contributions are taxed as income before taxes and withdrawals.
— SEP IRA: A simplified employee benefit IRA, or SEP IRA, works like a traditional IRA, except you can put in a lot more. Annual contributions to a standard IRA are capped at $61,000 versus $6,000 at $61,000. Another key difference: when you put money into your own SEP IRA, you must contribute an equal percentage of employees. This option is best for solopreneurs or those with few employees.
SIMPLE IRA: This option has a lower contribution limit of up to $14,000 in 2022 (for those under 50), but offers employee accounts and administration compared to a traditional 401(k) for smaller businesses. It’s easy to do. You must make a 3% grant or a 2% lump sum contribution to all employees. You can deduct contributions to your account and on behalf of your employees.
Get input from a pro
Of course, you can try to figure out which retirement plan is best for your business. Or you can work with a certified financial planner or registered investment advisor to determine the best path forward. The latter can give you confidence in your strategy, help you avoid costly penalties and ensure you don’t leave money on the table.
If selling is still part of your retirement plan, professional help is essential, says Norm Sherman, a certified consultant with SCORE, a national volunteer organization that offers free business advice. First of all, you need to know whether your company is marketable and what sales you can realistically expect.
An investment banker or business broker can evaluate your sales, profit margin, business structure and market to give you an honest assessment and help you better position your business for future sales.
“It doesn’t cost you anything to get answers to these questions,” says Sherman. “Don’t work blind; Find experts who can help you.”
The content is for educational and informational purposes and does not constitute investment advice. Kelsey Sheehy is a writer at NerdWallet. E-mail: [email protected] Twitter: @kelseylseehy.
How to bounce back after business failure https://bit.ly/nerdwallet-after-business-failure
Self Employed Retirement Plan Options https://bit.ly/nerdwallet-retirement-plans-self-mployed
Roth IRA vs Traditional IRA https://bit.ly/nerdwallet-roth-or-traditional-ira-account
What is a SEP IRA? How SEP IRA works