The truth about small business retirement plans
One of the most intuitive ways to think about the experience of small business owners as they start, run and grow their businesses is to compare it to raising a teenager.
A small business is like a teenager in two ways: 1) You always love it, but you don’t always like it; and 2) it always has its hand out for more money. And never is the second example truer than when you should be funding a retirement plan separate from future expectations from company assets.
As in the past, we recently polled small business owners again about retirement planning with this question: “Will you contribute to a qualified retirement plan this year?” We learned that 42% of our respondents are funding a plan, but the other 58% either aren’t able to fund their plan or don’t have one. By the way, these percentages have not improved since the last survey.
There are three reasons why small business owners don’t fund a retirement plan:
- The business never achieves the financial critical mass necessary for the owner to carve out the income to fund a plan. This is true for too many small businesses.
- They convince themselves that the business will provide for them in retirement, which is handy when you’re trying to justify paying the business first. Sometimes this works out, but sadly, most of the time it doesn’t.
- They never get started budgeting for a retirement contribution.
There are many ways the federal government hinders small businesses, but providing pre-tax retirement programs is not one of them. Indeed, there are several qualified plans that allow a small business owner to provide for their own retirement with tax-deferred contributions. Plus several include setting employees up on the same plan for their benefit while helping you attract better employees and keep them.
Here’s a partial list of prominent plans that cover most small businesses: The traditional Individual Retirement Account (IRA) is about to turn 40. The Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE) both include employee participation, as does the traditional 401k.
Be sure to check with a qualified retirement advisor to see which one is best for you. Also, IRS.gov has extensive resources that will educate you.
You might sell your business for a lot of money one day, but just in case, take advantage of one of the tax-deferred retirement plans.
Write this on a rock …Make the commitment; budget for and start funding a retirement plan this year.
Jim Blasingame is creator and host of the Small Business Advocate Show. Copyright 2013, author retains ownership. All Rights Reserved.
