Mar 01, 2021
By Donna Sanders, Vice-President and Partner at World Trend Financial
As an owner of a small business, you have proven that you are a self-starter by operating a successful private enterprise. Of equal importance is applying your skills towards saving for your future. Here are some of the most popular tax-advantaged retirement vehicles for small business owners and some tips on saving for retirement.
Options if you are not currently enrolled in a plan
For small business owners not currently enrolled in a retirement plan, here are three of the most popular retirement account options:
- Simplified Employee Pension (SEP) IRA Account. Contribute as much as 25% of your business’s net profit up to $58,000 for 2021.
- 401(k) Plan. Contribute up to $58,000 of your salary and/or your business’s net profit.
- Savings Incentive Match Plan for Employees (SIMPLE) IRA Account. You can put all your business’s net profit in the plan, up to $13,500 plus an additional $3,000 if you are 50 or older.
Which plan should you choose? SEP and SIMPLE IRAs are ideal for either sole proprietors or really small businesses (no more than one or two dozen employees). Due to higher administrative costs, 401(k) plans are usually more suited for larger small businesses (more than one or two dozen employees).
Tips to maximize your retirement contributions
For small business owners who are currently enrolled in a retirement plan, here are some suggestions for maximizing your annual contributions into your retirement accounts:
Pay yourself first. Instead of funding your retirement account with whatever is left over after paying your monthly bills, decide at the beginning of each month how much you want to set aside to fund your retirement. Make funding your retirement each month as important as your other bills. Then assume that you pay your retirement bill first. If you run out of money before paying all your bills, decide if there are any expenses that can be pared back for subsequent months so you can meet your monthly retirement savings goal.
List your retirement contributions on your income statement. It is easy to forget about retirement planning when running the day-to-day operations of your business. To keep retirement contributions top-of-mind, record these as a separate line item on your business’s income statement.
Review your tax situation at least twice a year. Tax planning is now more important than ever with the uncertainty caused by the recent pandemic. Review your tax situation at least twice every 12 months to see how to maximize each year's retirement contributions.
If you would like to discuss your specific situation, please reach out to Donna Sanders at firstname.lastname@example.org, or any of the investment advisor representatives at World Trend Financial. They can be reached in Cedar Rapids at 319-364-3064, or in Iowa City at 319-339-4884. We can meet via Zoom, conference call, or if necessary, in-person at either office.