How Small Business Owners Can Plan for Retirement

There are a wealth of personal finance advice sites online, but many of them seem geared for “regular” retirement investors — W-2 employees who draw a salary and have access to a group 401(k) and other benefits. So what about the rest of us? In fact, retirement planning options differ quite a bit for business owners and self-employed people — and that can be a great thing for your nest egg.

I asked Jeff Rose (pictured), a Certified Financial Planner, to shed some light on the topic. Rose is co-founder of Alliance Investment Planning Group, based in Carbondale, Illinois, and author of the blog Good Financial Cents.

ISBB: I can’t participate in a company retirement plan because I am the company — what now?

Rose: One of the best things about becoming a business owner is that you now have choices, especially when it comes to retirement plans. I had the same revelation when I jumped from W-2 employee to independent contractor a few years ago. The plan you ultimately decide on should be determined by a few key factors, including how much you want to defer and how many full-time employees you have. If you’re a one-person shop, then a SEP IRA or Solo 401(k) might be the direction to go. The SEP IRA is absolutely the cheapest to set up — you’ll just pay the annual IRA custodial fee to open the account. If you have employees, then a Simple IRA or traditional 401(k) might be your best option. The Simple IRA will cost less but the 401(k) will allow you to save more and potentially exclude new hires for a probationary period.

How do I plan for retirement if my business income varies significantly?

Once again, another perk of being a business owner: If you decide on a SEP IRA or traditional 401(k), as a business owner you have until the IRS’s extension filing date to make your contributions to the plan. (The 401(k) will need to have a profit sharing component to qualify.)

For example: As a business owner that has a SEP IRA, I had until October 15 of this year to decide how much I wanted to contribute for 2009. That way I could wait to see where my 2010 income is going to be before deciding which year to apply the contribution to. This is a huge advantage for business owners.

I hired my first employee(s) — should I start offering a 401(k) plan?

Not quite. The 401(k) is relatively more expensive to set up than the other plans, plus it also depends where you are in your business cycle. Basically, you want to make sure your cash flows are stable and your business can thrive before you offer retirement packages to your employees. Starting off with a SEP IRA or Simple IRA may be a cheaper option and give you some time to gauge how your business is growing.

When should I start thinking about who will take over when I retire?

It’s never too early to start thinking about a transition plan. One thing that a business owner can do to make the process much easier is to start a procedures manual. In every business, there should be a procedure outlining how to do something: Fill an order, handle a complaint, update inventory. It takes an owner gobs of time to train new people to do these basic tasks. With a procedure manual, you now have a step-by-step guide to how to run your business efficiently, which will make a much smoother transition down the road.

About Kevin Casey

Kevin Casey is a regular contributor here, at InformationWeek and elsewhere. Find him on Twitter @kevinrcasey.
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