Small Business and Financial and Retirement Planning
If you are self-employed or have small business, then you probably know that managing your own business takes a lot more than hard work. If you’re like most small business owners, your personal life and business life are practically inseparable. That’s why it’s important for your personal financial planning to take into account the unique considerations—and opportunities—of owning and operating a small business.
Financial planning for entrepreneurs tends to be quite complex, involving such factors as multifaceted estate issues, tax considerations, and succession planning. Due care in determining a personal financial strategy involves understanding the business as it is now and as it is forecast to be at retirement.
Then, investment portfolios can be constructed in synergy with the business. For instance, entrepreneurs with new startups or highly cyclical businesses may establish more conservative investment portfolios to offset some of the risk in their companies. There may be a time when one needs to help the other.
Recently released research * showed that small business owners display very little knowledge about the structure and costs of retirement savings plans available to them. SEP-IRAs, SIMPLE-IRAs, and Self-Employed 401(k) plans are three plans that are considered suitable for very small businesses. About half of those who use a Self-Employed 401(k) plan did not know the maximum annual employer contribution amount allowed for that type of plan. Also, about 60% of those with SIMPLE-IRAs were not aware that employer tax filing is not required. About 80% of owners who have SIMPLE, or SEP-IRAs say their employees contribute to the plans and reported a participation rate of around 84%.
It’s likely that the results of this research can be attributed to the fact that entrepreneurs are generally occupied full time with managing their businesses. But inadequate personal financial planning may have a negative impact on the business owner’s retirement and estate plans.
Single or individual 401(k) can be implemented only by self-employed individuals or small business owners who have no other full-time employees or part-time employees who work more than 1,000 hours a year (an exception applies if your full-time employee is your spouse).
With an individual 401(k) plan you can elect to defer up to $17,500 of your compensation to the plan for 2013 ($23,000 if you are age 50 or older by the end of the calendar year), just as you could with any 401(k) plan. Your business can make a maximum tax-deductible contribution to the plan of up to 25 percent of your compensation.
Because the amount of compensation deferred as part of a 401(k) plan does not count toward the 25 percent limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25 percent of total compensation to the profit-sharing plan on your own behalf. Total plan contributions for 2013 cannot, however, exceed the lesser of $51,000 (limits apply to traditional and Roth contributions combined) or 100 percent of your compensation (plus any catch-up contributions if you're 50 or older). SEP IRA has similar contribution limits to single 401 (k), however, unlike single 401(k), SEP IRA does not have Roth portion.
Whatever your goals are, I can walk you through the options and create and implement a retirement plan that fits your needs. Please feel free to contact me for a complementary consultation.
_________________________
* Source: Fidelity Investments Research (February 22, 2012)