This is a guest post by Shabana Shiliwala, who owns The Financial Sort, a financial planning company based in Austin, Texas.
Congratulations! If you’re reading this, it must mean your business is generating enough profit to afford employees, require tax planning and give you the prospect of a healthy financial future. When you have more profit than you need to run your business operations, it’s time to start a business retirement plan.
Just like parents tend to put their children first and take care of themselves last, business owners have a tendency to place the needs of their businesses before their own needs. Starting a business retirement plan is usually a low priority not only because of the effort and expense involved, but the benefits to the business aren’t obvious. Some business owners think that retirement plans only benefit employees. The reality is that they mainly benefit the business and the business owner. Most employees don’t contribute or contribute very little to retirement plans, whereas business owners who take full advantage attract higher-quality employees looking for comprehensive benefits, get large tax deductions, and build financial security for themselves and their families. The money you deposit in your own business retirement account is deductible, but unlike other business expenses, you’re not actually spending the money. You get to keep it–so not only are you saving on taxes, you’re also building a nest egg.
An accountant and broker/financial advisor can help you determine and set up the right plan for your business:
Self-employed: The SEP (Simplified Employee Pension) IRA allows you to deposit up to 25% of net earnings (net profit minus half of self-employment taxes and your deposit amount). Consult your accountant to help you determine your allowable contribution each year. Expenses are minimal and there are no required contributions, so you can skip contributions in slow years. If you need a higher tax deduction, consider the SIMPLE (see below) or the solo 401k, which has higher expenses but allows an additional contribution of $17,000 in 2012 (or $22,500 if you’re over age 50).
Small businesses with under 100 employees: The SIMPLE (Savings Incentive Match Plan for Employees) IRA allows you to contribute up to $11,500 in 2012 (or $14,000 if you’re over age 50) as long as you make an employee contribution as well. You can choose from a matching contribution of 3% where you only have to contribute for employees who contribute themselves or a 2% contribution to all employees regardless of whether they make contributions on their own. Expenses are minimal. If you’re willing to pay higher expenses for a higher tax deduction, see the choices for large businesses below.
Large businesses: A multitude of plans are available including pension, 401k and profit sharing. Expenses are higher but so are the contribution limits and the flexibility to design exactly the type of plan you want.
Now that your business is growing up, it’s time to start taking care of yourself too. A retirement plan can benefit yourself and your business. It’s important to stay on top of your financial game throughout the entire life of your business, so plan smart and plan ahead.