Small Business Retirement

July 5, 2017

Small Business Retirement

Small Business Retirement Planning

We have worked with several business owners and have noticed one thing many of them have in common. Many business owners do not plan early enough for retirement. It is indeed understandable why this often occurs. As a business owner, the first priority is making a profit and growing cash flow. The road to accomplishing that makes it easy to forget that you probably don’t want to work forever. To not work forever, you need retirement funds. It’s not a good idea to assume your business will flourish enough that you can sell it (or a portion) later and take the funds. Often times this will create a taxable situation that will make you wish you had planned differently.

From a tax perspective and overall economic perspective, it’s often best to setup retirement while you are still growing your business and make contributions for several years.

There are various options for business owners when it comes to retirement planning, though we would like to highlight one possible plan in this article: The SEP IRA. SEP stands for Simplified Employee Pension. There are other options that should be reviewed, such as SIMPLE IRA and 401K IRA, which will be reviewed in subsequent articles.

Some of the rules to establish a SEP IRA plan are:

  • The owners of the business can contribute for themselves (if your spouse is part owner, the business will be required to contribute for them as well).
  • If you have employees, they must be included in the plan if they have (1) attained age 21, (2) worked for your business in at least 3 of the last 5 years, (3) (for 2016 tax year)received at least $600 in compensation in 2015 and 2016 from your business for the year.
  • The eligibility provisions stated in the SEP plan document must apply equally to owners and employees.

Contribution limits:

Employer contributions for each eligible employee must be:

  • Based only on the first $265,000 of compensation for 2015 and 2016
  • The same percentage of compensation for every employee has to be used
  • Limited annually to the smaller of $53,000 for 2015 and 2016 or 25% of compensation
  • Paid to the employee’s SEP-IRA

We recommend you discuss all retirement plan options with your tax advisor. He or she can help steer you in the right direction.
The key is to ensure a business owner has a nest egg to live off when he or she exits the business. In our experience, many business owners wait too late to plan for retirement. This often costs the business owner in taxes and / or simply less cash to live off when he or she is unable to continue in the business.

There are several other rules that exist with the SEP IRA. Again, discuss with your tax advisor, as well as a financial institution that can set the plan up for you. Keep in mind that contributions to SEP accounts are always 100 percent vested, or owned, by the employee. Before deciding on a retirement account, consider all the rules outlined here as well the other rules that exist.

Please note, this article is not to be considered tax advice.

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