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Essential tips for picking your business retirement plans to help you save for retirement

Business Retirement Plans

If you're providing services or products to people. Whether as a bookkeeper, virtual assistant, store owner, or whatever you're doing. You're a small business owner. A small business owner is anyone who has less than $25 million in revenue every year. And that's the vast majority of individual businesses in this country. Today I'm going to share with you all about business retirement plans.

Business retirement plans are such an important topic. Because women generally do not save enough for retirement. You either rely on your husband or spouse to save in their retirement plans. What happens is you'll retire. Since men typically die a lot earlier than women do, that uses up a lot of the financial resources. Then you're stuck.

The plans I'm going to share are easy to set up and you can do them anywhere. However, there are three questions that you need to ask yourself when deciding to set up a retirement plan. And then I'll share the different plans that are available to small business owners. 

It's never too early (or too late!) to start planning your retirement.

Three questions to ask yourself when setting up a business retirement plan

There are three questions you need to ask yourself before you decide what kind of business retirement plan you should pick:

  1. How much do you want to put away? Not just for today, but how much do you want to be able to put away in the future? You should be thinking at least in the next five years
  2. Are you going to have employees?
  3. Do you want to pay the taxes now? Or do you want to pay the taxes later? 

How do you set up business retirement plans?

Many business retirement plans can be set up by you. Or you can find an online broker like Edward Jones or Raymond James. You can also find a local broker.  Many times you can find one through your chamber of commerce.  Make sure you get more than one recommendation though. You need to find somebody that is going to help you answer all the questions that you have made sure that you're comfortable with what you're doing and what they're doing.

Interview a lot of people to make sure you find somebody who makes you feel comfortable. Because if you are investing a significant amount of money, you want to feel comfortable with the person that's helping you manage that.

Consider all your options. You can be financially independent in retirement.

What options do you have for business retirement plans? 

The importance of knowing the answers to the three questions above will make picking a plan much easier.

Knowing how much you want to put away in the future will help you know what kind of plan to pick.  You don't want to keep changing plans because your income and your contributions are going up. So you need to know what your projections are for your business over the next five years.

When you decide if you're going to have employees in the near future, that will also help determine which plan you will pick.  Some plans require you to not only put away money for yourself, but you have to also put money away for your employees as well.

Taxes and business retirement plans

Knowing if you want to pay taxes now or later will help you pick between a traditional or a Roth plan. The difference between those two is the tax rate. What do you think your tax rate is today versus what you think it's going to be in the future.

Financial planners used to think that people would be in lower tax brackets when they retired. But they've found that to not be true. People's cost of living does not drop significantly when they retire. Generally, when they retire, they are in the same tax bracket as they were before.

If you're in a lower tax bracket now, then it might be a good idea to pick the Roth option. However, if you're in a high tax bracket and you think you're going to be in a high tax bracket later on. Or you think you're going to be one of those people who will pay less in taxes in retirement then maybe going the traditional route would be better for you. So you must talk to your tax advisor.

Now mind you, none of this is tax advice. I'm just doing this for education, so it's important that you talk to your advisors, and get clarity for what works best for you before you set up any plan.

Women generally do not save enough for retirement. Do you have a plan?

Common business retirement plans for small businesses

The following are the commonly used plans for small businesses and the amounts you can put into each plan.

IRA - Individual Retirement Account

The IRA is an individual retirement account. There is a traditional option and a Roth option. This is a personal plan and this isn't considered a business plan. So that means that if you set this up, you wouldn't have to put money in for employees.

The issue with the IRA is that you can't put in a lot of money. An IRA is capped at $6,000 per year. That's the amount for 2021-2022. If you are over 50, you can put in an additional thousand dollars per year. You can set up this plan so that you're doing regular contributions to the plan.

So you don't have to come up with $6,000 or $7,000 in April. You do have until the date that your taxes are due to contribute.  If you do go this route, make regular contributions every month.

The traditional IRA and Roth IRA are simple to set up. You can set them up pretty much with any brokerage, online brokerage, or anybody that sells securities.  Also, you can also set them up with your bank. Just make sure you don't invest them at your bank because your bank is only going to do CDs and stuff. You want to make sure that you've got more options.

Simple Plan or Simple IRA

I love this second option for small businesses.  It's a nice bridge between an IRA and some of the bigger plans. This plan is a business plan. So if you pick this plan, you and your other employees could put money into the plan. And then the company will do a match. The match is 3% of salary or a max of 3% of salary. If the employee puts money in, you can do 2% of the salary for all employees. If your employees don't contribute to this plan, then you don't have to match their contributions.

This plan doesn't cost a lot of money.  There is a fee for each employee. Which is usually about $20-$40 a year.  There are no tax returns that you have to file for this plan. So it's a simple plan.

Each employee, including you, can put up to $13,500 per year. And the employee contribution will come out through payroll.  If you are a sole proprietorship or a partnership, you could either make regular contributions to the plan, or you could make your contribution by the end of January. And then you could make a matching contribution by the date your tax return is due.

So for 2021-2022 you can contribute $13,500. And there's also a $3,000 catch-up contribution you can make if you are over the age of 50. Now this plan does not have a Roth option. Everything goes in for taxes with this plan.

401K or Roth 401K

A 401K plan works via contributions out of payroll. If you are a sole proprietor, you can make regular contributions to your 401k. There's a plan called a solo 401k, which has fewer requirements and it's less expensive to run. But 401ks typically have higher fees.

The setup fee can be $500-$1000 per year for a small 401K plan.  But you can contribute $19,500 for 2021 and $20,500 for 2022. Plus there is a $6,500 catch-up if you are over the age of 50.

Now we're starting to get into big numbers and then with the employer match, you can craft how you do the employer match for a 401k. You can do no match,1%, 2%, or 3%. Some businesses will do 50% up to 6% of salary. Employees have to put in money to get a full match.

And there is also a profit-sharing option where you could do up to 25% of compensation. So with a 401k, you can pretty much pick any percentage, but the total max that you can put into that plan is $58,000 for 2021 and $61,000 for 2022 plus the catch-up amount.

To hit those big numbers, you have to have a high compensation.  You'll need a salary of approximately $200,000. 

SEP - Simplified Employee Pension Plan

This plan has the same max numbers as the 401k. But all the money is put in by the employer. So $58,000 for 2021, and $61,000 for 2022. And this is a profit-sharing plan. So you're putting away up to 25% of the employee compensation and your compensation.  Your compensation would be your profit.

So you can put up to 25% of your profit away if you're a sole proprietorship, but you have to do that for all your employees as well. And they don't have to put anything in now. You can set the percentage every year, but once you get locked into that plan, you can't put money in for yourself, unless you're willing to put in money for your employees.

A SEP is only a good plan if you have a highly profitable business and you want to put that money away for your employees as well.  If you don't want to do that, then you want to avoid SEP because the employee contribution can get very large, very quickly.

However, if you are going to be solo and you have a very profitable business. Then a SEP could be the way to go. There is no Roth option on the SEP.

The only two that have the Roth option are the IRA and the 401K.

If you have any questions at all, you can leave them in the comments. You can fill out the AskKristin.net form. Or you can message our Facebook page, or send me a DM on Instagram.

Episode 75 Business Retirement Plans

​Disclosure: We professionally create this podcast that receives compensation from companies that we talk about. So you must assume that any link you click is an affiliate link. Kristin and Ingram Digital Media only have affiliate relationships with companies that we believe in wholeheartedly. We are independently owned, and all of our opinions are​ our own.


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