In the Black? Start Thinking About Investing For the Future

BY: ON FRIDAY, NOVEMBER 23, 2012

As a business owner, there are two occurrences that are the most exciting.  The first is getting your business started.  Nothing feels more free that going into business for yourself.  The second is going into the black and finally seeing some profits.   Show me the money!

One common pitfall that I see from most business owners though is that they spend so much time in the business; they don’t do any time planning for retirement.  If you are a business owner and are finally starting to see some profit, it is time to start putting some of that away.  Here are the best options for small business owners you can do when saving for retirement.
  1. Start an IRA

    The easiest thing you can do is start up an IRA, Individual Retirement Account.  You will have two options, the Traditional or the Roth IRA.  Most business owners will be more fond of the Traditional IRA because you get to write that off your taxes and business owners love deductions. 

    If you are younger and more forward thinking, then setting up a Roth IRA can be a lot more attractive because of the potential of tax-free money in retirement.  Either way, the Traditional or Roth IRA will allow you to put up to $5,000 a year if you are under the age of 50, $1,000 of catch-up for those over the age of 50, and is one of the least expensive ways to get a retirement account started.   Plus, they are super easy to setup.  You can set one up at a local bank, a local brokerage firm, or do it online at places such as Scottrade or E*Trade.  Here's a handy resource of some best places to open an IRA

  2. Keep it SIMPLE

    If you want to put more money away, another option you have is called the SIMPLE IRA.  The SIMPLE IRA allows you to put in $11,500 per year for 2012 (increases to $12,000 in 2013) with a $2,500 catch-up for those over the age of 50.  This does require a little bit more number crunching if you have employees because you will have to match up to 3% of your employee’s wages if you want to start saving for yourself.  Just like the Traditional or Roth IRA, setting up the plan is really simple and very cheap.  It is a non-ERISA plan so that means you don’t have to file anything with the IRS.

  3. The SEP IRA. 

    The SEP IRA is attractive for those that want to save more than the $11,500 that the SIMPLE IRA allows.  The SEP IRA gives you the ability to put in the lesser of 25% of your net earnings or $49,000.  If you are able to sock away the full $49,000, you are definitely way into the black.

    When I first started my business, this was the direction that I went.  One of the attractive features for me was

    • It gave me the ability to put in 25% of my income and
    • It is very simple to set up

    The only downside for businesses that have employees is that whatever percentage you choose for yourself, you have to match on your employee’s behalf.  For example, if you are putting in 20% of your income into your SEP IRA, you are going to have to put in 20% of all of your employees income as well.  If you have a large number of employees that get paid a pretty hefty salary, that is a pretty big sum coming out of the company’s checkbook.  There are ways to exclude certain employees so get up to speed on the SEP IRA rules.  Definitely check with a CPA before setting that up.

  4. The Big Time

    The final option for small businesses is setting up the traditional 401(k) plan.  This is an ERISA plan so it requires filing what is called a 5500 with the IRS.  You could do this on your own but it is definitely not suggested.  You have to hire a TPA (third party administrator) to file a 5500 on your behalf and that fee can cost anywhere from $250 on up to $5,000 or more depending on the size of your company.  The major benefit is that the 401k limits allow you to put in just as much as the SEP IRA while not having to contribute as much for your employees.
This is a primer of some of the business retirement accounts that you can set up for yourself.  Take some time out of your business and focus on your future.  

About the Author

Jeff Rose
Jeff is a Certified Financial Planner recently founding his own investment advisory firm Alliance Wealth Management, LLC. He is the founder of Good Financial Cents (a top 25 finance blog according to Wisebread),  Soldier of Finance – his upcoming book project that combines his military background with his financial planning knowledge, and Life Insurance By Jeff - a blog dedicated to helping families find affordable life insurance solutions.
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