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Save While You Build

As a business owner, the ideal situation would be to create a company that grows large enough that it can sustain not only a comfortable living style for the owner currently, but also into their retirement. Many business owners don’t want to build and own a company that lasts their lifetime, they want to build and own one that surpasses it; funding their annual income during and after their desired working years. When measuring success, an easy goal to set is one that has the company operating smoothly, generating large amounts of income, and being managed by someone overseen by the owner. Eventually, the owner should become a guest; popping in and out whenever they feel the need to, knowing everything is being handled by those they put in management.

What owners forget, or often feel is unnecessary, to do – is save for retirement.

The main “plan” for the owner is to live happily off the income generated by the company long into their retirement. What they sometimes don’t consider is how easily a company can fall. It takes blood; sweat and tears to build a company into greatness, but can take just a few breaths to knock one down given the right circumstances. That is why, as retirement advisors, we suggest contributing to retirement accounts during the entire process of building, maintaining and then stepping away from, ownership.

As an owner, saving for yourself can be difficult or simply put on the back-burner, coming second to reinvesting into the company. To make it easier for owners, there are options that can help lighten the stress of making that decision.

  1. SEP IRAs: Simplified Employee Pension IRAs can provide owners/employers with a great ability to set aside money for their retirement, and sometimes their employee’s retirements. The benefits of such an IRA are:
  • Flexible contribution amounts up to 25% of the person’s pay
  • Account easily setup and maintained

For Schedule C business owners, a main worry is not having enough deductions and essentially hurting yourself tax-wise. Another issue with large Schedule C income is not paying much into Social Security like W-2 wages, thus Schedule C earners are not getting enough out of it when the time comes to register. Using a SEP IRA gives Schedule C people a helpful tax deferral that lets them claim the higher income and the contributions are partially deductible. It gives them a method for saving for their future retirement and not solely relying on Social Security during that same retirement period.

  1. Traditional IRA: As per usual, Traditional IRAs have a strong presence and are a main choice for retirement accounts because they allow a decent amount for saving, and taxes can be deferred until the person takes regular distributions. This type of account also has parameters that are easy to follow and contributions can be deductible if you qualify.
  • The person can contribute until they are 70 ½ and have earned income
  • Maximum contribution annually is $5,500 (for 2015 – 2018) unless they are 50 years of age or older, then some can make match up contributions up to $6,500

* Depending on the income situation: contribution amounts, qualifying deductions and taxable percentages on distributions will vary.

  1. Life Insurance and/or Annuities: For those who are considered high income or high net worth individuals, a good alternative to help save for retirement can be Life Insurance Policies or Annuities. Since many of these individuals do not qualify for full tax deductions due to their “highly compensated” income status, these alternatives can help give generous tax deferrals.
  • Parameters for life insurance policies and annuities can be very complex. Many are based on the type of business and ownership setup.

(photo source: istock.com)

It is highly advisable that any option a business owner looks into regarding retirement savings should include a financial advisor. Tax deductions and deferrals are very particular with parameters and a simple error could cost someone greatly. By seeking a financial advisor, retirement planning can be integrated with Social Security optimization and current income planning, ultimately giving a full financial picture of what they have versus what they can do to help improve their situation.

The most important piece is ultimately the ideal retirement. Business owners work day-in and day-out building an entity to improve many people’s lives and provide many goods or services. Reinvesting solely in the company may seem like a good plan at first, especially if the business grows successfully, but has its pitfalls that can be quick and painful. Having a retirement plan setup separate from the success of the business can only help improve one’s lifestyle in the future.