Retirement Strategies for Small Business Owners

October 7, 2018 — 4:27 PM EDT

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 2018, employees can defer up to $12,500 of their salary, pretax, and those who are 50 or older can defer up to $15,500 by taking advantage of a $3,000 catch-up contribution. However, employees who participate in other employer-sponsored plans can contribute no more than $18,000 in all employer-sponsored plans combined.

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 $270,000 in 2018. Employer contributions are tax deductible. 

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 2018, it lets employees make pretax contributions of up to 25% of income or $55,000, 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 your employees’ behalf, so you aren’t locked in to 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. (See More: Business Owners: How To Set Up An SEP IRA)

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 2018 is $5,500 ($6,500 if you’re 50 or older). 

Finally, if your small business has no eligible employees other than your spouse, you can contribute to a Solo 401(k) – read 401(k) Plans For The Small Business Owner.

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

More than a third of small business owners surveyed in 2014 said they didn’t want to retire, a quarter said they don’t plan to retire, more than a third said they plan to divide their retirement time between work and leisure, and more than half said they would find it hard to completely retire. 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.