Business owners spend their entire working lives dedicating themself wholeheartedly to their business. The years fly by as you continue to work hard until you suddenly reach retirement age.
But business owners never really retire. Right?
That doesn’t have to be true! Business owners have a right to retire just as any other worker would. But, their path of retirement planning is quite a bit different.
Today we’ll cover the unique circumstances behind retirement for business owners and give you a roadmap to navigate the winding road.
Let’s dive in!
Understanding Retirement Planning for Business Owners
Business owners can struggle to retire in a couple of different ways. One is that there are some unique hurdles to overcome regarding finances and business planning. But the other is working through the transition to retirement emotionally.
Typically, business owners love what they do. They’ve built it from the ground up! But, when the time is right, you might be ready to retire.
As a business owner, you have to cut through a little bit of red tape before you can ride off into the retirement sunset. Some of those hurdles are:
- Business Succession Planning
- Business Exit Strategies
- Tax considerations
- Legal considerations
- Re-creating your identity
Before we get too deep into the weeds on each of those different hurdles, let’s first talk about the types of retirement plans available to business owners.
Retirement Plans for Business Owners
You’ve likely heard of retirement savings plans like 401ks, but have you heard of these?
- Individual Retirement Account (IRA)
- Simplified Employee Pension (SEP) IRA
- Solo 401k
- Defined Benefit Plans
We’ll look at the nuances of each and see if any are a good fit for you and your retirement savings goals.
IRAs
Anyone with earned income can open and contribute to an Individual Retirement Account (IRA). IRAs allow you to choose from various investment options, including stocks, exchange-traded funds (ETFs), or mutual funds.
The most common types of IRAs are traditional and Roth. Traditional IRAs are tax-deductible, meaning your annual taxable income decreases by the amount you contribute to the account.
Traditional IRAs also grow tax-deferred, and withdrawals during retirement are taxed at your ordinary income tax rate for that year.
Roth IRAs are the opposite. Your contributions aren’t tax deductible in the year you make them, but your withdrawals during retirement are tax-free.
The contribution limits for traditional and Roth IRAs are the same:
- $6,500 for 50 and under
- $7,500 for 50 and older
Roth IRAs have income limits for those that qualify, so if you’re interested in opening an account, chat with your financial advisor to see if it’s an option for you.
SEP IRA
A SEP IRA, or Simplified Employee Pension Plan, allows business owners to save for retirement with significant, pre-tax contributions.
Withdrawals in retirement are taxed as ordinary income, but the potential for compound growth within the account makes it possible to accumulate a sizeable nest egg.
However, you can only make contributions based on your net income. For 2023, contributions can’t exceed the lesser of 25% of your income or $63,000. So while the contribution limit is relatively high, it’s important to note before you commit.
SEP IRAs are easy to use and manage, which makes them ideal for self-employed business owners who want to save for retirement.
Solo 401k
A 401k and a Solo 401k are the same except for one detail. A Solo 401k is only for a single employee or self-employed business owner.
You still get Traditional and Roth options; the only difference is that you’re the employer and the employee. The 2023 contribution limits are also the same: $22,500 or $30,000 if you are 50 and over.
An extra benefit of a Solo 401k is that it allows you to make a backdoor Roth IRA contribution.
Defined Benefit Plans
Another name for this type of plan is a pension plan. So, you may be familiar with them! They differ from other retirement savings accounts because the payout doesn’t rely on investment returns. Instead, you know the specific payout when you retire.
As the employer and employee, you’ll fund the plan by contributing a regular amount into a tax-deferred account. In essence, the money being contributed to the plan is deferred compensation.
When you retire, you can receive withdrawals from your pension as a lump sum or monthly throughout your lifetime.
Each business and business owner is different, so work with a financial professional to determine which plan works best for you and your retirement savings goals.
Business Exit Strategies and Retirement Planning
So you have money saved to retire, but will you lock up your office and throw away the key on your last day of work?
Let’s talk through some business exit strategies you could consider.
Selling The Business
As a business owner, you can sell your business to anyone you’d like! Such as family, friends, an internal employee, an open market, or a merger or acquisition.
If you sell your business, you have the opportunity to control the following:
- The price you sell for
- Whom you sell to
- Your role in the company moving forward
If you know you can’t completely step away from your business during retirement, consider you want to stay on as a consultant. Just make sure to write that into the sale agreement!
Selling is also a great option if you need liquid funds to help cover your retirement costs.
Liquidating the Company
Most business owners likely don’t want to go this route, but it is available. Liquidating would include closing the business and selling any assets related to the business.
This can be tough because you only profit from what you can sell. Client lists, business relationships, and other tangible assets are priceless but don’t hold much value during a liquidation.
Your exit strategy needs to support your financial and retirement goals. Work with a financial professional to deem the best path for you and your business.
Seeking Professional Advice for Retirement Planning
Deciding to retire from your business is a challenging and personal decision. As business owners ourselves, TFS Advisors can be a great resource and ally for you as you navigate this difficult transition.
If you’re a business owner just starting your retirement saving journey or are a few years away from retirement and looking for guidance on what to do next, we’re here to help.
Please reach out and schedule a time to talk with us today. We look forward to helping you ease into this next phase of your life.
