Building Your Retirement Nest Egg: A Guide for Entrepreneurs
As someone who grew up in the 80’s and 90’s, financial literacy classes weren’t a thing like they are today. No one talked to me about money other than to tell me to save it, which I never did. I literally got a job at Abercrombie just for the discount. Most of my paycheck went right back into the store. I was broke. But I looked great! It wasn’t until I got my first real job out of college that I was introduced to the 401(k). Like many people that work for most mid to large companies, that was the only retirement savings option available. And in my brain, a 401(k) was the only way to save for retirement. It wasn’t until I began working in finance did I learn that there are so many other options.
If you own your own business or if you’re thinking about starting your own business, and you’re like me, coming from the corporate world, you may not be aware of how many options are available to you to save for retirement. Since each plan has different advantages and disadvantages, depending on your situation, I wanted to do a shallow dive to explore retirement vehicles tailored to business owners to empower you to make informed choices to maximize your retirement savings.
1. Solo 401(k) - A Self-Employed Superpower
The Solo 401(k) is a potent retirement savings tool for self-employed individuals. As an entrepreneur, you can contribute both as an employee and an employer, allowing for higher contribution limits compared to other retirement plans. It's an excellent choice if you have a consistently higher income from your business.
2. Simplified Employee Pension (SEP-IRA) - Simplicity and Savings
The SEP-IRA is a straightforward option for business owners with or without employees. It allows you to contribute a percentage of your business income, making it flexible and easy to manage. Contributions are tax-deductible, which can reduce your taxable income.
3. Individual Retirement Account (Traditional and Roth IRA) - Building Wealth Your Way
IRAs are versatile and available to anyone, including self-employed individuals. A Traditional IRA offers tax-deductible contributions, while a Roth IRA provides tax-free withdrawals in retirement. Choose the one that aligns with your tax and financial goals.
4. SIMPLE IRA - Streamlined Savings for Small Businesses
If you have employees and want to offer them retirement benefits, the SIMPLE IRA is an accessible choice. You and your employees can contribute, making it suitable for small businesses. Contributions are tax-deductible, and there's a lower administrative burden.
5. Defined Benefit Plan - Secure Retirement for Higher Income Entrepreneurs
Entrepreneurs with a higher income might consider a defined benefit plan. It allows for substantial tax-deferred contributions and provides a fixed retirement income. These plans are more complex and may require professional assistance to set up.
6. Health Savings Account (HSA) - A Double-Duty Savings Account
Although HSAs are primarily for medical expenses, they can also serve as a retirement vehicle. Contributions are tax-deductible, and when used for qualified medical expenses in retirement, withdrawals are tax-free.
7. Cash Balance Plan - Accelerate Retirement Savings
Cash balance plans are an advanced retirement vehicle that benefits business owners with consistent, high income. These plans combine features of a 401(k) and a defined benefit plan, allowing for substantial tax-deferred contributions.
Your retirement savings strategy should align with your business goals and personal aspirations. Whether you're a solo entrepreneur or have employees, there's a retirement vehicle that suits your needs. Remember, maximizing your retirement savings is not only a financial strategy but an investment in your future. As a business owner, you're building your legacy, and securing your retirement is an essential part of that journey. With the right retirement vehicle, you can pursue your financial goals and enjoy a prosperous retirement.
If you have any questions or need personalized advice, feel free to reach out to me at jennifer.jenkins@bluestonewp.com. I’m here to help you make the most of your retirement savings!
Disclaimer: This blog post provides an overview of retirement vehicles for entrepreneurs. It's essential to consult a financial advisor to choose the best plan for your specific circumstances and goals.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
