As a small business owner, you are completely responsible for your own retirement planning. If you have employees, you may feel responsible for helping them plan for a successful retirement. The considerations and retirement savings plans that work you, as a small business owner, should be paramount when planning for both your own retirement and that of your employees.
Choose a Traditional Retirement Strategy
There are some traditional options other than using your small business to fund your retirement, such as IRAs and 401(k)s, that function as additional sources of retirement income other than liquidating your small business.
Establish a SIMPLE IRA: The savings incentive match plan for employees, or SIMPLE IRA, is one retirement plan available to small businesses. In 2022, employees can defer up to $14,000 of their salary, pretax (rising to $15,500 in 2023). Those who are 50 or older can defer up to $17,000 by taking advantage of a $3,000 catch-up contribution. The catch-up contribution rises to $3,500 in 2023, so the total that those who are 50 or older can defer is $19,000. However, employees who participate in other employer-sponsored plans can contribute no more than $20,500 in all employer-sponsored plans combined (rising to $22,500 in 2023).
Employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation. Conversely, employers can contribute 2% of each eligible employee’s compensation of up to $305,000 in 2022 (rising to $330,000 in 2023). Employer contributions are tax-deductible.
Small Business Owners on Retirement: Remington, IN
Set up a SEP IRA: A simplified employee pension (SEP) is another type of individual retirement account (IRA) to which small business owners and their employees can contribute. In 2022, it lets employees make pretax contributions of up to 25% of income or $61,000 (rising to $66,000 in 2023), whichever is less. Like a SIMPLE plan, a SEP lets small business owners make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire.
Almost any small business can establish a SEP. It doesn't matter how few employees you have or whether your business is structured as a sole proprietorship, partnership, corporation or nonprofit. Each year, you can decide how much to contribute on behalf of your employees, so you aren’t locked into making a contribution if your business has a bad year. Owners of the business are also considered employees and can make employee contributions to their own accounts.
Overall, the SEP plan is a better option for many small businesses because it allows for larger contributions and greater flexibility.
IRAs and Solo 401(k)s: If you’re in a competitive field and want to attract the best talent, you might need to offer a retirement plan, such as the two described above. However, employers are not required to offer retirement benefits to their employees. If you don't, one way you can save for your own retirement without involving your employees is through a Roth or traditional IRA, which anyone with employment income can contribute to.
You can also contribute to an IRA on your spouse’s behalf. Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement; traditional IRAs let you contribute pretax dollars, but you’ll pay tax on the distributions. The most you can contribute to an IRA in 2022 is $6,500 or $7,000 if you’re 50 or older. These limits increase to $6,500 and $7,500 respectively for tax year 2023.
Finally, if your small business has no eligible employees other than your spouse, you can contribute to a Solo 401(k).
Develop an Exit Strategy for Your Business
It might seem strange that developing a business exit strategy should be one of your first considerations when planning for retirement. But consider this: the small business you spend your life building might become your largest asset. If you want it to fund your retirement – and to stop working – you’ll need to liquidate your investment. To prepare to sell your small business one day, it needs to be able to operate without you. It’s never too early to start thinking about how to accomplish that goal and about how to find the best buyer for your small business.
Market conditions will affect your ability to sell your business. You might want to build flexibility into your retirement plan so you can sell your stake during a strong market or work longer if a recession hits. You definitely want to avoid a distress sale: One problem you’ll encounter if you wait until the last minute to exit your business is that your impending retirement will create the impression of a distress sale among potential buyers and you won’t be able to sell your company at a premium.
The Bottom Line
Many small business owners say that they don't want to retire, or at least not retire fully. But even if you’re among the many small business owners who plan to keep working, establishing a retirement plan for your small business is a good idea because it gives you options—and having options means you’ll feel more satisfied with whatever path you choose.