business next and training them to do so is essential for both
retaining the value of your business and protecting its longevity.
But retirement planning for SBOs includes more than just business succession. Hopkins explains that setting up an employer
-sponsored retirement plan “can actually put a small business
owner on more financially-stable ground.”
Simple and cost-effective options for retirement savings include
the SEP IRA and SIMPLE IRA. Contributions to these plans are
tax-deductible, and neither plan requires annual IRS reporting—a plus for business owners.
“The main difference between SEPs and SIMPLEs is that SIMPLEs
allow for employee contributions, whereas SEPs do not allow
for employee salary deferrals or contributions. So, if an employer
wants the employees to contribute to the plan, a SIMPLE could be
a better choice,” notes Hopkins. In 2018, the maximum contribution to a SEP IRA is the lesser of 25 percent of total compensation,
or $54,000. For SIMPLE IRAs, an employee salary contribution
cannot exceed $12,500. Hopkins notes that both SEPs and SIMPLEs require almost all long-term and full-time as well as many
part-time employees to be covered by the plan.
A tax-qualified retirement plan like a 401(k) plan can also be a
strong option for a small business. This plan allows you and your
employees to make tax-deductible contributions, and the money
grows tax-deferred. Business owners can also deduct the contributions they make to their employees’ savings from the business’s
gross revenue, which reduces the company’s taxable income.
In addition to providing tax benefits, offering employees a
retirement plan can help you attract and retain top talent, and
maybe even improve performance. According to a study by
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International Foundation of Employee Benefit Plans (IFEBP),
four out of five employers report that their employees’ personal
financial issues impact job performance. Offering a retirement
plan and hosting regular financial planning sessions can help
ease this stress. To help employees boost their savings, consider
offering automatic enrollment and escalation features. Data from
Principal shows that plans with automatic enrollment average 34
percent higher participation.
• BIG-PICTURE PLANNING •
Since it’s impossible to predict future tax- or government pro-gram-related legislation or changes, striking a balance among
assets that are tax-deferred, taxed as they grow, and taxed
up front is important for a diversified portfolio. Mark West,
associate vice president-Business Solutions at Principal, stresses
the benefits of life insurance for business owners and executives.
While term life insurance is valid for a specific period of time,
cash value, or permanent, insurance is designed to continue
throughout your life. Term life insurance may have lower premiums, but cash value policies also allow you to invest additional
funds beyond the premium.
“Life insurance can be an important part of succession planning.
It can be used to buy out a partner or pass along or sell your
business,” West says. “But be sure to work with an experienced
financial professional, as structuring your policy properly will be
key to achieving your goals.”
To give yourself and your employees the best retirement possible, start planning and saving now, and adopt a tax-diversified
approach that uses a variety of assets.