Are you so wrapped up in growing your small business that you've neglected your personal finance planning? If so, you're not alone. Research by The American College has shown 40 percent of small-business owners have no retirement savings or pension plans.
Not all retirement vehicles are the best choices for a small business depending on the makeup of the business itself and what its owner hopes to get for retirement income.
Here are some of the more common retirement options for the small-business owner, including a few that could also be used by the business.
Traditional and Roth IRAs
Both of these individual retirement accounts allow a business owner to contribute into an account up to a limit set by the federal government each year. Contributions to a traditional IRA may also be tax deductible depending on income and whether or not the taxpayer's or spouse's employer is covered by a retirement plan, according to the IRS.
For 2012, the contribution limits for both types of IRAs is $5,000, or if you are over age 50, the limit is $6,000.
The basic difference between a traditional and a Roth IRA is retirement disbursements from a Roth IRA are not taxed. Early withdrawals from both types of accounts may be subject to penalties.
The problem with traditional and Roth IRAs is the low contribution limit isn't sufficient to support a retiree by itself.
Fortunately for small-business owners, there are other IRA options as well as other retirement vehicles.
A typical family-run small business with 15 to 20 employees could be a good fit for a 401(k) retirement plan, especially if the company is looking for a retirement plan that includes its employees, says Greg Stevens, senior financial counselor with Cabot Money Management in Salem, Mass.
While the advantage to a 401(k) is the contribution limits are fairly high—$17,000 for 2012—a downside could be the company contributes to its employees' accounts as well.
"You need to make sure the benefits are spread out to employees as well," Stevens says, adding that a small business might not want to offer a retirement plan to its workers. "Do you really want to, or can you afford to, offer the same benefit to your employees at the same time?"
That's where a SEP IRA could come in to play.
A Simplified Employee Pension Individual Retirement Arrangement allows a business to contribute to employees' pensions based on a percentage of each worker's earned income.
For 2012, the limit was $50,000 or 25 percent of the worker's income, which ever amount was smaller.
An advantage to the small-business owner is contributions made to this type of account are tax deductible for the business, Stevens says.
A Defined Benefit Plan
This type of plan allows business owners to contribute based on a projected retirement benefit—the amount you want to have at retirement.
To put such a plan in place, a business owner would have to enlist the help of an actuarial firm to create the plan and determine the contribution amounts, Stevens says.
A benefit to a DB plan is that it lowers the overall taxable income of the company.
Designed for sole proprietors and their spouses, an Individual 401(k)—also called a solo 401(k)—allows the business owner to contribute up to $50,000 in 2012. The contributions grow tax-deferred.
Another advantage is a portion of the contributions can be a tax deduction. "You could put away a pretty substantial amount of money without a lot of earnings [with the tax deduction]," Stevens says.
A Savings Incentive Match Plan for Employees IRA allows each employee to put a portion of salary into the account before tax. The contribution limit for 2012 is $11,500; over age 50 the limit is $14,000.
The company then matches up to 3 percent of the worker's earnings. An advantage to this type of account is that the employer contribution is tax deductible, Stevens says.
Each of the retirement accounts comes with fees for set up, administration costs, tax filing and other expenses, Stevens says. He recommends sitting down with a financial adviser to determine what would be best for your small business.
Linda is an award-winning journalist with more than more than 22 years' experience as a reporter, editor and blogger. Linda blogs via Contently.com.