Top Retirement Plan Strategies for Small Business Owners

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Jean Chatzky will be covering a variety of different topics in this space every month. Come back next Tuesday for the third article in this month’s Retirement series.  Please leave your retirement questions as comments below and she will address several of the questions at the end of the month.

Recent research has clued us into the one thing that is working above all others to make retirement planning a success:  Having someone else force you to save. A new study from the Employee Benefits Research Institute shows that when workers are automatically enrolled into 401(k)s or workplace retirement plans, 80 to 90 percent of employees participate in the plans and there’s only a 20 percent chance of running out of money in retirement.  In situations where you have to pull the trigger yourself, there’s a 50 percent chance of running out of money in retirement.

That spells trouble for small business owners – and their employees.  Why?  Because participation in retirement plans is significantly lower at small companies, says EBRI’s Jack Van der Hei. At companies with fewer than 10 employees, only 12 percent of the workforce participates.  At companies with 10-24 employees, 22 percent participates.  And at companies with 25-99 employees, 34 percent participates. “It’s absolutely devastating how low they are for very small employers,” Van der Hei says. 

So what can you do to turn the odds in your – and your employees – favor?  You can commit to getting started, says David Wray, CEO of the Profit Sharing 401(k) Council.  One of the reasons small business owners shy away from retirement planning is that the landscape is more complicated than it is at larger companies.  The silver lining is that you have more choices and are able to sock away substantially more money than employees of large companies – if you do it right.  Wray suggests small business owners approach their retirement planning needs in stages.

Stage 1: Fledgling Business.  At this point in your life and the life of your company, you – as the owner/manager – are likely working day and night.  You’re probably taking little salary while pouring every last resource back into the business to make it successful.  That’s one of the reasons plan participation at companies with less than 10 employees is so anemic.  Wray says don’t sweat it.  “I don’t think it’s realistic for businesses less than 3 or 4 years old to have retirement plans,” he says. “The owner can’t be distracted by this.  They have to focus on the outcome.”   That said, if you’re not going to have a plan, I want to encourage you to think about putting at least some money into an IRA.  You can put up to $5,000 into a Traditional or Roth IRA this year, $6,000 if you’re age 50 or over. (Single filers with modified adjusted gross incomes over $120,000 and married filing jointly filers over $176,000 earn too much to get into the Roth).  Wray says I’m dreaming.  “They can have an IRA,” he says. “But what I see is that these entrepreneurs are putting every last dollar back into their businesses.”  Still, you can’t fault a gal for trying. 

Stage 2: Business Off The Ground.  In this stage of your business life, you’re hiring real full-time people and they want to know: Where’s the 401(k)?  Where’s the health care plan?  What are my other benefits?  And you start to think: I want to have loyal committed workers, I need to have a benefit plan.  The two options you'll want to consider:

• SIMPLE plans are a good option for companies with 25 or fewer employees.  Your own contributions are deductible from federal taxable incomes and your employees can make pre-tax contributions. But you’re required to match contributions – at least to some degree – for all elgible employees.

• 401(k).  The most flexible plan – and the one that works best for companies that have more than 25 employees.  Slimmed down reporting requirements makes it easier, says Wray, to start a fairly simple plan and make it more robust over time.

To make your decision and get started, you’re going to want to get help.  Start with a recommendation from your business accountant and go from there.

Stage 3: You’ve been in business for a while and you’re thinking about retirement.   At this point, you’re going to want to supercharge your contributions for you (and your spouse if he or she is in the business, too.)  This is where a more complicated 401(k) plan design becomes effective, says Wray.  “With the right demographics, you can contribute 6 percent for your employees but the maximum of $49,500 for the owner.”  The issue is that if you skated through stage 1 and stage 2 without focusing on retirement, you might be profitable now, but you really need to save, save, and, oh, save some more.    The other type of retirement planning that needs to be done now falls under the heading of exit planning.  This is the time to start thinking about whether selling part or all of the company – perhaps to the people who have worked with you to grow it – makes sense.  It’s not only a feel good solution, it can be the very best way to boost that retirement stash.

Jean Chatzky, award-winning journalist and best-selling author, is the financial editor for NBC's "Today," a contributing editor for More magazine, and a columnist for The New York Daily News. She is the author of six books, including her newest, Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved. Check out Jean's blog at JeanChatzky.com. You can also follow her on Twitter and Facebook.

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