By Antonio Porretta
When you’re a business owner, the line between career and personal life is often blurred. You’ve put your heart and soul into your business for so many years, so it can be a challenge to find the balance between prioritizing personal finances and your business.
A common struggle business owners face is creating a plan to convert their successful business into long-lasting personal wealth—namely retirement. Many small business owners invest personal savings into their business, and 34% don’t have a retirement savings plan. (1) This creates a bleak situation as they draw closer to retirement and don’t have a nest egg to rely on.
Your retirement is just as important as the success of your business. Consider the following 4 steps to help you catch up for retirement in a hurry.
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.
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 2021, you can contribute up to $6,000, or if you’re over age 50, a total of $7,000.
With a Roth IRA, your contributions are not tax-deductible like traditional IRAs. However, your earnings are tax-deferred and your withdrawals are tax-exempt (subject to IRS guidelines). Like a traditional IRA, you can contribute up to $6,000, or if you’re over age 50, a total of $7,000.* However, one caveat to the Roth is that there are income restrictions. (2) If your income surpasses the cutoff amount for a Roth IRA, you can still contribute to one through a backdoor Roth transaction.**
*Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.
**Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth 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 25% of your self-employed income or $58,000 per year (whichever is the greater amount).
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 are tax-deferred. 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 $19,500 (or $26,000 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 $64,500 if you’re over the age of 50.
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. Around 78% of small business owners plan to sell their businesses to fund their retirement, with the sale profits funding 60-100% of their retirement needs. (3) 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 will make 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. Partner With a Professional
Being a business owner complicates life and finances (that’s no surprise!); in addition to saving for retirement and taking care of your family, you have employees to think about and tax considerations. Given your unique situation, it would benefit you to work with someone who specializes in serving business owners.
That’s where we come in. At Blackbridge Financial, we specialize in serving small business owners and providing differentiated services to develop a holistic plan designed to connect them with their future. To learn more about how we can help you catch up for retirement in a hurry, set up an appointment today by emailing me at email@example.com or calling 704.960.9646. We look forward to hearing from you soon!
Antonio Porretta is an independent wealth manager at Blackbridge Financial with over 20 years of experience. He specializes in helping people create, distribute, and preserve their wealth. Antonio received an executive MBA from Saunders College of Business at Rochester Institute of Technology in 2007 and also holds the Accredited Asset Management Specialist (AAMS®) designation. Originally from Rochester, NY, Antonio has been a resident of Harrisburg, NC, since 2007. Outside of work, he enjoys playing soccer and tennis, coaching, and spending time with his wife, Laura, and their children, Cristiano, Victoria, and Matteo. To learn more about Antonio and how he can make a difference in your financial life, visit www.blackbridgefinancial.com.
Check the background of investment professionals associated with this site on FINRA’s BrokerCheck.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Blackbridge Financial are separate entities from LPL Financial.