O'Connor: No 401(k)? No problem for small businesses
In spite of the continued woes of the economy, small-business owners are showing increased optimism about the next 12 months, according to a recent Wells Fargo/Gallup Small Business Index survey.
Despite their generally sunny outlook, however, many of them still are concerned that they won’t have enough money to retire or might have to retire later in life.
Many small-business owners have delayed saving for their own retirement, choosing instead to put their resources into growing their business. And some small-business owners plan on proceeds from selling their business later in life to sustain them financially in retirement.
Experts estimate that Americans will need 70 percent to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs.
Retirement plans are not limited to the popular 401(k). In fact, there are many retirement options, even for small businesses. It is critically important for small-business owners to make sure they consider all their retirement options and find a solution that best suits their individual needs.
• Traditional or Roth IRA: Among the simplest and most popular ways to save for those who are self-employed, an individual retirement account (IRA) can hold a variety of investments.
• Individual 401(k): The individual 401(k) is worth considering for those who are self-employed or for business owners who only employ their spouse. Its relatively high contribution limits allow you to pay less in current income taxes while saving more for retirement.
• Simplified Employee Pension (SEP) IRA: With a SEP, a small-business owner can contribute and deduct up to 25 percent of “earned income,” up to an annual maximum of $51,000 for 2013.
• Other plans, such as a profit sharing, simple IRA and even defined benefit plans might be an option.
In addition to potentially providing for a solid financial future, establishing a retirement plan also has certain tax advantages for a small-business owner.
Small-business owners can take advantage of a nonrefundable tax credit that the federal government offers to encourage companies with 100 or fewer employees to establish and maintain retirement plans.
A retirement plan also can be flexible.
Some plans allow for contributions to be skipped or reduced in lean years.
There are many types of retirement plans, and no one plan is right for every business. While retirement plans can provide benefits to the business, business owner and employees, it’s important to realize that each business must be closely considered to determine which plan is the best fit.
A retirement adviser can help by reviewing a business’ goals and objectives and/or existing retirement plans, and running hypothetical illustrations to help determine which plan makes the most sense.
Having a retirement plan in place will set any small-business owner on course for a more solid financial future that can weather any storm.
If you have no current retirement plans, your first New Year’s resolution should be to change that. Start your retirement plan tomorrow. Have a happy and safe new year.
• Timothy J. O’Connor is a certified financial planner and first vice-president/investment officer at Wells Fargo Advisors LLC in Woodstock. He has been a financial adviser for more than 26 years and specializes in all phases of retirement income planning. Reach him at firstname.lastname@example.org or 815-337-9470.