Small businesses are the backbone of the American economy. Millions of hard-working Americans are employed by these small businesses, and each of these business has one or more owners who also depend on the business for their income. When it comes to retirement benefits, large corporations and companies overshadow their smaller counterparts in the options offered to employees.
There are retirement options for small businesses, but they often contain hidden fees. Some of these plans may offer investment options that are unsuitable or are a nightmare to navigate. Combine these pitfalls with a cost to the business that can be overwhelming and we see small businesses remaining statistically less likely to offer retirement plans to their employees.
There are ways to offset the negatives and turn the offering of retirement options into a positive for your small business. Before you begin the process of selecting a plan for your small business, you’ll need to calculate your retirement net worth. Once you have that information, you can look at options for your business. Here are seven of the best strategies for doing this:
1. The 401(k) Reigns Supreme
The term “401(k)” is probably the most recognizable retirement planning term known to the average employee. It is traditionally the most widely known retirement product available on the market. There is a reason for that: it is a fully loaded, high-performance plan for retirement that can be tailored to fit any income level. This type of plan generally lets business owners and employees make consistent, tax-deferred contributions throughout their working careers. As an employer, you can choose to match, or not, the employee contributions.
2. Roth 401(k) Option
If you or your employees harbor a fear that you’ll be hit with higher taxes down the road, you may find a Roth 401(k) to be a viable alternative to a standard 401(k) plan. The Roth 401(k) allows participants to have taxes taken out of their contributions on the front end. This makes their withdrawals in retirement tax-free, including any earnings. Many find this to be a big help when deciding how to manage their tax situation and retirement funds over time.
3. Simplified Employee Pensions
This type of plan is generally referred to as an SEP and are a popular retirement plan among small businesses. These plans are easy to get started and are 100 percent fueled by employers funding. They don’t have all the amenities found in a standard 401(k) plan but it can be a powerful little retirement tool, nonetheless. With an SEP, all of the funds included in the plan are put in by the employer, making the account immediately vested for the employee.
4. Solid and SIMPLE IRA
This plan’s name can be a bit misleading. The SIMPLE IRA name actually stands for Savings Incentive Match Plan for Employees. With this plan, both the employee and the employer make contributions into the plan. Whatever the employee contributes must be matched by the employer. The matching funds are immediately vested for the employee. The employee contribution is generally limited with this plan but there is a catch-up option for employees who are over 50.
5. Individual retirement account via payroll deduction
This type of retirement account can best be described as a 401(k) plan on training wheels. Contributions come directly out of your paycheck or your employees’ paychecks. As the business owner, you have no responsibilities to the IRA other than making sure the money transfers go through. There are contribution limits for participants under 50 and if there are employees who want to contribute more than allowed, they can be switched to a standard 401(k) plan that can accommodate the greater savings.
6. Profit-sharing plan
Who doesn’t love a good profit-sharing plan? The foundation for a 401(k), in actuality, is a profit-sharing plan. A 401(k) is just the section in the tax code that allows employees to put salary deferral contributions into a retirement plan in addition to profit sharing. In most businesses, the deferral is allowed but the profit-sharing portion is not offered. Small and family-owned businesses can benefit from sharing the profits. It allows for an accumulation of gobs of money into the profit-sharing plan, over and above the amount contributed via salary deferral. When this addition is allowed, you have the opportunity to save even more toward retirement.
7. Have an exit strategy
As the owner of a small business, you are responsible for your own retirement. Unless your small business is a cottage industry you’ve got going on the side, you won’t have a retirement plan unless you make one for yourself. While it may seem strange to be thinking about how you plan to separate yourself from your business when you’re ready to retire, it is a necessary train of thought that you’ll need to board one day. As the business owner, you have to consider that one of the best ways to fund your own retirement may be to sell the business. If you can liquidate your investment, you’ll probably be in a good shape for your golden years.
The bottom line is the bottom line
When surveyed in 2014, more than one-third of small-business owners said they couldn’t envision themselves ever retiring. Another one-third said they saw themselves splitting their retirement time into equal parts work hours and leisure time. More than half admitted that the thought of retirement was not something they looked forward to.
Even if you are one of these small-business owners who plans to keep working, it is still a good idea to establish a retirement plan for your small business. Doing so gives you options, and having options is always a good thing. Just keep in mind that an appealing small business retirement plan is a major draw for top employees to join your company, and it can keep them there.
Your small business is your baby, and if you plan to run it until you die, go for it. Just make sure you’re doing it because you want to, not because your anemic bank account is forcing you to continue.