Are you a business owner starting to contemplate retirement? Retirement is a big financial challenge for anyone, but it can be especially difficult for business owners. Your retirement doesn’t just impact you. It can also affect your customers, employees and others who rely on your company.
It also may be difficult to untangle yourself from the business’s operations. If you founded the company, you may be involved in every aspect of the business. Even if you weren’t the founder, as the owner you probably wear many different hats. Retirement isn’t as simple as just walking away.
There’s also the issue of funding your retirement. Many business owners put every resource they have into the business’s growth. They may ignore retirement savings at the expense of the business. That approach can create challenges when it comes time to exit the company.
Below are a few common strategies business owners use to fund their retirement. If you haven’t considered your funding strategy, now may be the time to do so.
Sale of Business
Are you counting on the sale of your business to fund your retirement? You’re not alone. This is a common strategy for many business owners. It’s possible that you could sell your business for a significant amount. However, it’s important to start the planning process early.
Many business owners overestimate the value of their business, or they underestimate the time needed to find a qualified buyer. Business sales can be complex transactions, and it’s possible your buyer may not be able to structure the purchase in a way that provides substantial upfront cash.
It’s also possible that you may need to create your own buyer. For example, you may need to transition the business to a key employee or a family member. In that case, your retirement could actually be a multiyear transition as you train the new owner. If you’re counting on a business sale to fund your retirement, you may want to start the planning early.
You may want to pursue strategies beyond the sale of your business. One option for doing so is a SEP IRA. This type of IRA is designed specifically for those who are self-employed or who own a business. It allows you to contribute a substantial portion of your income to the IRA every year on a tax-deductible basis. You can also make deductible contributions on behalf of your employees.
You can allocate your SEP IRA funds across a wide range of investments. Growth is tax-deferred, which means you don’t pay taxes until you take distributions. Your withdrawals from the SEP are treated as taxable income, and you could also face an early withdrawal penalty if you take a distribution before age 59½.
Finally, you could also implement a 401(k) plan in your business. Many business owners assume that 401(k) plans are only for large companies. However, they can also be used in small businesses.
In a 401(k) plan, you and your employees can make pretax contributions to an investment account, and then choose from a menu of investment options. Growth in the account is tax-deferred, and distributions are taxable.
As the business owner, you may also offer a matching contribution to your employees as a benefit. For example, you might match the first 3 percent of their contributions. This type of benefit could help you attract and retain key talent.
While a 401(k) plan can be an effective tool, it can also create significant administrative and regulatory burdens. You could be legally responsible for the maintenance and management of the plan, so it’s important that you have disciplined processes in place.
Ready to develop your retirement strategy? Let’s talk about it. Contact us at Trinity Financial today. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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