By Brian Bloxom, ChFEBCSM
Running a business is often more demanding than a regular job, making managing both personal and business finances a challenging juggling act. One of the biggest hurdles for business owners to overcome is creating a plan for long-term personal wealth—particularly for retirement.
Most small business owners funnel personal savings into their businesses, and a large percentage of them lack a retirement savings strategy. This can lead to stress about their future, as retirement age approaches and they find themselves without a sufficient safety net. Given that your retirement is just as important as your business’s success, consider the following four steps to quickly catch up on retirement savings.
1. Find the Right Plan for You
Unfortunately, you don’t have an employer-sponsored 401(k) account with matching contributions at your fingertips. That doesn’t mean you are out of luck when it comes to building a nest egg. Here are some savings options to consider.
Traditional IRA
A traditional IRA is similar to a 401(k) in that you can contribute pre-tax dollars to an investment account that grows tax-deferred. For 2023, you can contribute up to $6,500, or if you’re over age 50, up to $7,500. For 2024, the IRA contribution limits increased to $7,000 for those under age 50 and $8,000 for those age 50 or older.
Roth IRA
With a Roth IRA, your contributions are not tax-deductible like traditional IRAs. However, your earnings grow tax-deferred and your withdrawals are tax-exempt (subject to IRS guidelines). Like a traditional IRA, you can contribute up to $7,000, or if you’re over age 50, a total of $8,000. However, one caveat to the Roth is that there are income restrictions. If your income surpasses the cutoff amount for a Roth IRA, you can still contribute to one through a backdoor Roth transaction.
SEP IRA
A SEP IRA, also known as a Simplified Employee Pension, is an IRA similar to a traditional IRA. As an employer of yourself, you can make contributions on your own behalf for your retirement. You can set up a SEP IRA in addition to a solo 401(k) and can contribute either 25% of your self-employed income or $69,000 per year (whichever is the lesser amount).
Solo 401(k)
A solo 401(k) is similar to a traditional 401(k) you’d contribute to as an employee. Funds invested within a solo 401(k) plan grow on a tax-deferred basis. The powerful feature of this plan is that you can contribute in two separate capacities, as an employee and as an employer. Wearing your employee hat, you can defer up to $23,000 (or $30,500 if age 50 or older). As the employer, you can also contribute up to 25% of compensation as defined by the plan. Combined, you can contribute up to $69,000 if you are under 50 and $76,500 if you are 50 or older.
Adding a Defined Benefits Plan
In order to save more than what your IRA limits you to, you can set up a defined benefit plan. These plans have much higher tax-advantaged contribution limits and can be designed to fit the needs of almost any business. Depending on your age and income, a defined benefit plan allows you to set aside up to hundreds of thousands of dollars to fund your retirement, making it possible to save a lot, even if you have little time.
Ultimately, everyone’s situation is unique, so there’s no one right solution. However, for many people, it makes sense to contribute pre-tax and post-tax dollars to several different accounts. For example, along with a solo 401(k), you may also want to contribute to a Roth or SEP IRA.
2. Banish Debt
The less debt you have when you enter retirement, the better. Whether it’s personal debt in the form of credit cards, car loans, or a mortgage, or business debt in the form of bank loans or equipment purchases, reducing your debt before retiring will lower your monthly expenses and enable your savings to grow and last longer. Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first.
3. Look Ahead to the Future
Do you have an exit plan? Even if you are just in the beginning stages of your business, it’s imperative to have a plan for the future of your company because it will likely become one of your largest assets.
If you are heavily relying on the sale or succession of your business to take care of your future financial needs, it’s critical that you start thinking about how and when you may want to leave your business and what you can do now to prepare so you receive the highest price possible.
Having a strategic transition plan makes your company more appealing to buyers who want assurance that it will continue to thrive without you. Even if you’re passing the business on to family members, you need a plan in place to ensure that it continues to prosper and all family members are treated equally.
4. Work With a Trusted Advisor
Being a business owner adds layers of complexity to managing both your life and finances. Aside from saving for retirement and supporting your family, you also have responsibilities to your employees and tax obligations. In light of your unique circumstances, it’s wise to collaborate with professionals who specialize in supporting business owners.
At Sentinel Wealth Partners, we focus on retirement planning for business owners by offering tailored services to address all aspects of their financial concerns. To discover how we can assist you in quickly catching up for retirement, schedule an appointment with us today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.