By The AllGen Team
Financial planning for business owners is crucial.
While building and expanding your company might be your top priority, it’s equally important to plan for your financial future. And, unfortunately, many business owners neglect to invest properly for their retirement. Recent data shows that over 40% feel they aren’t saving enough, often because they’re focused on growing their business. While understandable, this can limit your options later. Don’t make this mistake.
In this article, we summarize seven different retirement account options available to business owners.
Traditional IRA
As a business owner, you can make pre-tax contributions to a traditional IRA retirement account. Within the account, your investments grow tax-deferred, so you won’t have to pay taxes on your earnings until you take them out in retirement.
However, depending on your Modified Adjusted Gross Income (MAGI), retirement withdrawals can be subject to regular income tax. Therefore, it’s critical to understand income restrictions and any additional qualifying conditions that can apply to traditional IRA contributions and deductions.
SEP-IRA
A Simplified Employee Pension (SEP) IRA is a retirement plan that can help business owners optimize retirement savings. Among its many strengths is the ability to make significant contributions and enjoy tax breaks, thereby lowering your taxable income.
It’s important to remember, though, that SEP IRAs have income and eligibility limitations. Additionally, withdrawals in retirement are typically taxed as ordinary income even though contributions are tax-deductible.
SIMPLE IRA
Another type of retirement plan that enhances financial planning for business owners is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. It’s a relatively simple and affordably priced retirement plan that offers tax incentives to both employers and employees. Employers can match employee contributions to their SIMPLE IRAs, and employees can make contributions to their own accounts.
Like traditional IRAs, a SIMPLE IRA allows for tax-deductible contributions and tax-deferred growth of earnings. Keep in mind, however, that there are withdrawal restrictions and contribution caps. Consider consulting with a financial professional to find out if a SIMPLE IRA is the best option for your company.
Roth IRA
A Roth IRA is another retirement savings account with tax incentives. In contrast to traditional IRAs, contributions to a Roth IRA are made with after-tax dollars. This means that in the year you make your contributions, you won’t be eligible for a tax deduction.
Nevertheless, the tax-free growth and tax-free withdrawals in retirement are the real strengths of a Roth IRA. If you meet specific requirements, you can withdraw your contributions and earnings tax-free. Even though Roth IRA contributions have income restrictions, they can be an effective tool for financial planning for business owners.
401(k)
Another smart financial planning option for business owners—especially those with a large number of employees—is a 401(k).
401(k)s allow employees to contribute to an investment account with a percentage of their salary. Employers have the option of matching a percentage of employee contributions.
As a business owner, you can lower your annual taxable income by contributing pre-tax money to a 401(k). That means you won’t have to pay taxes on your 401(k) earnings until retirement because the funds grow tax-deferred.
Additionally, 401(k)s typically offer a wide range of investment choices, including stocks, bonds, and mutual funds. You can customize your investments to fit your financial objectives and risk tolerance.
Solo 401(k)
Similar to a traditional 401(k), a solo 401(k) is specifically designed for self-employed individuals. Employee contributions in 2024 are capped at $23,000. You can also contribute as the employer up to $69,000 total. In general, these programs are simpler to administer than a traditional 401(k).
Defined Benefit Plan
A defined benefit plan is a retirement plan where the employer commits to providing a specific specified benefit upon retirement. In contrast to the other retirement plan choices we’ve summarized, which force the account owners to choose investments that are not guaranteed, a defined benefit plan does provide a specific payout that is usually based on an employee’s income and years of service.
The benefit amount limit in 2024 is $275,000, making these plans particularly important to consider if you’re older and trying to make up lost retirement funds.
We’re Here to Help
The retirement accounts we’ve discussed can all be customized to fit your stage of life and overall financial goals. The most important first step is to identify your objectives and create a strategy to pursue them. From there, you can select the retirement plan that works for you and your company.
If you need guidance, we’d be delighted to help you select and implement an appropriate plan. Together, we can design your path to financial freedom. To schedule a complimentary meeting, call (407) 210-3888 or email advisors@allgenfinancial.com.
About AllGen
Based in Orlando, Florida, AllGen Financial Advisors, Inc. is an independent, fee-based Registered Investment Advisor (RIA) firm dedicated to helping individuals and businesses maximize their financial resources. The AllGen team comprises trusted advisors, each with specialized skills, providing comprehensive guidance and tools to clients at any stage of life or socio-economic position to experience and maintain financial freedom. AllGen offers highly tailored financial planning and investment management, helping clients understand their current financial situation and define their future goals. The team develops and executes customized plans to pursue these goals, managing and tracking investments and financial progress along the way. Known for being relatable and approachable, AllGen’s advisors leverage their vast experiences, education, and interests to make complex financial concepts understandable and personal. At AllGen, clients are treated as individuals, not just numbers.
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