If you’re a small-business owner and you’re worried about retirement, you aren’t alone. Two-thirds of the business owners who responded to a recent survey said they worry that they aren’t financially prepared for retirement*. In fact, one-third of the respondents reported that they haven’t established any sort of personal or business-sponsored retirement plan whatsoever**.
Luckily, there are a couple of ways small-business owners can begin saving for their retirement years by utilizing tax-deferred accounts. Both individual 401(k) plans and SEP IRA accounts are relatively easy and inexpensive to establish, and will allow you to being planning for the future while taking advantage of certain tax benefits.
If you choose to establish an individual 401(k) plan, it’s important to learn the contribution limits in order to take advantage of all tax benefits. If you’re under age 50, you can contribute up to $17,500 in 2013 with all taxes deferred. If you’re 50 or older, the annual limit is higher at $23,000. Additionally, you’re allowed to contribute 20 percent of your earnings as an employer (or 25 percent if your business is incorporated). This amount can also be deducted as a business expense. Between these two types of contributions, the total contribution you can make in one year is set at $51,000, or $56,500 if you’re 50 or older.
Your other option is to contribute to a SEP IRA account. As with the 401(k), these contributions are tax deductible, subject to certain limits. Currently the annual contribution limit for a SEP IRA is 20 percent of your net earnings, up to a limit of $51,000. You can usually deduct these contributions as a business expense on your taxes, but there are certain rules and procedures for doing so. Consult your accountant or financial advisor for full details.
Even though most of your attention is probably devoted to growing your business, it’s important to take the time to plan for the future. Making a retirement plan today means you can begin taking advantage of tax benefits now, and you’ll enjoy a healthier financial future tomorrow.