Retirement Planning for Business Owners

Oct 12, 2020

  • Do you own a small business or earn income as a self-employed individual?
  • Are you looking to make higher annual contributions to a retirement account?
  • Are you looking for additional tax deductions?

If you’ve answered “yes” to one or more of these questions, a small business retirement account might be a good fit for you.

As a small business owner, you’re responsible for setting aside funds for your own retirement. You can even establish a plan if you’re self-employed. And if you have employees, you have the power to help them put away money for their retirement. Offering a retirement account can help you attract and retain top talent, especially if you’re in a competitive field.

Starting a retirement savings plan is easier than you might think. What’s more, retirement plans offer significant tax advantages to both employers and employees.

In this article, we’ll cover IRA and Defined Contribution plans that you can take advantage of, as well as the benefits of setting up a retirement plan.

Keep in mind that all these accounts can be self-directed into a wide array of alternative assets. You can use these accounts to invest in assets like…

  • Residential, commercial, and industrial real estate
  • Private mortgages
  • Trustees
  • Private lending
  • Private equity
  • Real estate investment partnerships
  • Precious metals
  • And much more

Here’s a quick overview so you can understand which business retirement account is right for you.

IRA-Based Plans

Let’s say you own Brainboost Learning Center, a small business with 30 employees.

Brainboost decides to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions, dollar-for-dollar, up to 3 percent of each employee’s compensation. That means that if your employee doesn’t contribute to their SIMPLE IRA, you don’t need to pay a matching employer contribution.

Your head tutor, Robin, has a yearly compensation of $50,000 and contributes 5 percent of his compensation ($2,500) to his SIMPLE IRA. The Brainboost matching contribution is $1,500 (3 percent of $50,000). Therefore, the total contribution to Robin’s SIMPLE IRA that year is $4,000 (his $2,500 contribution plus Robin’s $1,500 contribution). The financial institution holding Robin’s SIMPLE IRA has several investment choices and he can choose the options he likes most.

Under this option, if a Brainboost employee does not contribute to their SIMPLE IRA, then that employee does not receive any matching employer contribution.

In another example, let’s say you own Brainfood Juicery next door, your other small business with 20 employees.Brainfood has a SIMPLE IRA plan for its employees and will make a 2 percent nonelective contribution for each of them. Under this option, even if your Brainfood employee, Raine, doesn’t contribute to her SIMPLE IRA, she would still receive Brainfood’s employer contribution to her SIMPLE IRA that equals 2 percent of her compensation.Raine’s annual compensation is $20,000. Even if Raine doesn’t contribute this year, Brainfood must still make a contribution of $400 (2 percent of $20,000).

Defined Contribution Plans

Benefits of Setting Up a Retirement Plan

If you’re self-employed or run your own small business, you likely don’t have many hours in a day to plan out your retirement. It can feel like a juggling act when you’re trying to balance income-producing activities, debt-reduction activities, and running day-to-day business operations in between. Still, it’s crucial not to let retirement planning fall by the wayside. Not only do retirement accounts offer tax-sheltered earnings—you’re also able to save a higher dollar amount than you could otherwise.

Here are some significant advantages to consider:

Greater security

The sooner you start a plan, the more financial security that you and your employees will have in later years. Even small contributions can make a significant difference over time. Some plans, like the SEP IRA, have generous contribution limits so you can set aside large amounts for retirement.

“Catch-up” rules

Employees over age 50, including yourself, benefit from higher contribution limits.

Lower taxable income

Employer contributions are deductible from the employer’s income. Employee contributions aren’t taxed until distribution, unless they’re going into a Roth.

Faster growth

Retirement savings enjoy faster compound growth in a tax-free environment.

Distributions may be eligible for tax-favored rollovers or transfers

You can roll over your funds into a new IRA or employer-sponsored plan.

Tax credits

for the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of retirement plans. The credit equals 50 percent of the cost to set up and administer the plan, up to $500 per year for the first 3 years of the plan.

Saver’s credit

Certain low- and moderate-income individuals, including those who are self-employed, get a credit for making contributions to their plans.

Selling Your Business

Chances are, that small business you’ve poured your heart and soul into might actually be one of your largest assets. If you’re ready to exit your business, you can find a buyer and liquidate your business.

Long before retirement, consider researching your potential sale price early, and update it often. Consider the sum that you’ll need for a comfortable retirement—this will give you a rough valuation goal to work towards.

Market conditions will affect your business’s value. We’d recommend building flexibility into your market plan so you can sell your stake during high times. Alternatively, you can opt to work a while longer if a recession hits. The most important thing is avoiding a distress sale. If you wait until the last minute to sell your business, potential buyers may perceive a distress sale, and you may have a lower chance of selling your company at a premium.

We Can Help

If you need help setting up a retirement plan for your small business, we’re happy to help you get started. Please fill out the form below and we’ll get in touch shortly.

DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.


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