Small business owners should plan for retirement
By Bradley O. Olson, for SBT
Small business owners work extremely hard building successful companies. With the time demands of running a business, planning for a secure retirement can be neglected.
There are three steps needed for a small-business owner to ensure a comfortable retirement:
Step One: Establish a retirement plan for your business. A retirement plan can accomplish two things. First, it can lower your taxes. Second, it allows you and your employees to plan for the future, while in most cases, deferring taxes until the funds are withdrawn.
There are several qualified retirement plan options that offer a tax-favored way to save. Defined contribution plans such as SEP, SIMPLE, 403(b) and 401(k) plans are typically funded with a percentage of current salary. A business owner can deduct contributions made to the plan for employees.
If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. Earnings on the contributions are generally tax-free until you or your employees receive distributions.
Defined benefit plans are classified into two common types, called profit-sharing plans or money purchase plans. With a profit sharing plan, your business agrees to contribute a percentage of its profits to a retirement plan that benefits both owners and employees.
A money purchase plan allows your business to fund a plan with a fixed percentage every year, regardless whether the company makes a profit.
Individual retirement account plans (IRAs) include both the traditional IRA and the Roth IRA. Contributions to a traditional IRA may be deductible and earnings grow tax deferred. Distributions from a traditional IRA are taxable to the extent of deductible contributions and growth. Contributions to a Roth are never deductible and earnings grow tax-deferred. If certain requirements are met, retirement distributions from a Roth are tax-free.
You can also use a non-qualified plan that allows business owners to structure a deferred compensation plan to reward select employees, and can serve to supplement qualified retirement plans.
Business owners have to determine what they want to accomplish with their retirement plan. Is it designed to maximize your savings, your employee’s savings or both?
Step Two: Business succession planning is another key element in planning for retirement. It establishes a smooth transfer of operations and/or ownership to family or another entity. Plus, it will help prepare the business for unforeseen events, such as death or disability.
There are several steps in preparing a succession plan. A key aspect of planning for continuation is calculating the worth of your business. To calculate the value of the business you should know the average book value (3 to 5 years), average net income (3 to 5 years), the length of goodwill based on the owner, salaries required to replace the owner, a long-term growth rate and the current market value. By knowing these facts you can work to determine the value.
A retiring business owner needs to plot his or her scheduled departure. This will ensure smooth operations during the time of transition, as well as facilitate change in ownership.
Is the plan to keep it in the family, sell to a current partner, sell to other employees or sell to an outsider? Whatever the case, you should begin to have these discussions as you approach retirement.
Some transfer ideas would be a buy-sell arrangement, a family limited partnership, gifting or an employee stock option plan.
Step Three: Individual savings and investments are the third primary source of retirement income. An individual can chose to accumulate funds using a wide range of investment vehicles. The appropriate type will depend on a number of factors, such as an individual’s investment skill and experience, risk tolerance, tax bracket and number of years to retirement.
By using modern portfolio planning theory, an investment portfolio can maximize returns and minimize risk.
If a business owner addresses these three key steps, they will be rewarded with financial security in retirement.
Brad Olson, CFP, is a senior vice president at Landaas & Co., Milwaukee.
Nov. 28, 2003 Small Business Times, Milwaukee
