An Entrepreneurial Conundrum – Building Retirement Wealth While Building a Business

An Entrepreneurial Conundrum – Building Retirement Wealth While Building a Business

May 17, 2018

Entrepreneurship is alive and well in America. Nearly 15 million people in the U.S. are self-employed, approximately 10% of the working population according to the Pew Research Center.  These entrepreneurs have an additional 29.4 million people working for them and together they account for approximately 44 million jobs, which is 30% of the national workforce.

For many of these self-employed business owners, much, if not all, of their net worth is tied up in their businesses. Adequate cash flow to cover operating expenses and managing through times when business lags or client payments are slow is a key concern, as is putting aside money for reinvestment in the business.

As a result, for many self-employed individuals, saving for retirement is often last on their list of priorities. For some, a healthy nest egg at retirement is the optimistically anticipated result of the sale of their business upon retirement. In fact, over 34% of entrepreneurs surveyed by the small business site, Manta, did not have a retirement savings plan, while over 20% used their previous retirement savings to fund their businesses. Optimistic and driven, an entrepreneur’s retirement planning may often be a leap of faith, relying on future business success and an eventual sale.

Size and Structure Matter when Determining Retirement Plan Suitability

Determining the retirement plan that makes the best sense for an entrepreneur and his or her business is primarily influenced by the structure of the business and the number of employees involved. For example, whether a company is a sole proprietor or a limited liability company will factor into the determination of the most appropriate plan design.

While 401(k) plans may make sense for larger companies in terms of set-up costs, investment choices, administrative duties and IRS filing requirements as well as fiduciary responsibilities, a SEP IRA may make more sense for a much smaller business owner in terms of administrative burden and pricing. In this article we will explore the types of plans that may be more appropriate for the smaller business owner in America. These plans can be funded throughout the entrepreneur’s working life so that the assets needed to help them live comfortably in retirement can be planned for over the long-term.

Growing Retirement Wealth while Growing a Business

There are a number of smaller-scale retirement plan options for the self-employed small business owner that can be funded throughout their working lives. For example, the following three solutions, among a number of others, provide America’s growing entrepreneurs the opportunity to plan for their retirement while growing their business:

  1. A SEP IRA – A popular solution for sole proprietors, a Simplified Employee Pension, or SEP IRA, enables self-employed individuals to contribute as much as 25% of their net self-employment income up to a maximum of $55,000 in 2018 into a tax-deferred savings account. Limited paperwork, no annual IRS reporting requirement and relatively high contribution limits make the SEP an attractive proposition. Contributions are made by the employer only and are tax deductible as a business expense.
  2. A Solo 401(k) – With a Solo 401(k), self-employed individuals and their spouses can make annual salary deferrals up to $18,500 in 2018 as employees, plus an additional $6,000 if they are 50 years or older, on a pre-tax basis or as designated Roth contributions. In addition, as an employer, the entrepreneur can contribute another 25% of compensation, with a maximum overall contribution of $55,000 for 2018. Typically, it is also possible to take out a loan against a Solo 401(k), up to half of the account balance with a 5-year repayment period, which provides additional flexibility. However, there is an annual IRS filing requirement once the account exceeds $250,000.
  3. A Simple IRA – A Savings Incentive Match Plan for Employees is designed specifically for self-employed individuals with no more than 100 employees. For 2018, employees, including the self-employed business owner, can contribute up to $12,500 pre-tax income with an additional $3,000 in catch-up contributions for contributors 50 years and older as of the end of the calendar year. Employers are generally required to match each employee’s contributions, including their own as an employee, on a dollar-for-dollar basis up to 3% of the employee’s salary or a flat 2% of pay regardless of the employee’s contribution amount.

ABG Southwest – A Resource for a Variety of Retirement Plans – Big or Small

Whatever the type or size of business and an entrepreneur’s goals for the future, Alliance Benefit Group Southwest’s experienced retirement planning professionals can provide meaningful advice and relevant retirement solutions. From larger 401(k) plans to smaller-scale solutions tailored to smaller business owners such as the solutions discussed above, ABGSW can match the appropriate solution to the specific business situation. Contact Dennis Davis to learn more.

Alliance Benefit Group Southwest (ABGSW) is a sister company of REDW LLC. This article first appeared in the Spring 2018 issue of the ABG Retirement Plan Solutions Newsletter.

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