For Mark Roberts’ Use: A survey of small-business owners revealed that two-thirds of them worry that they are not financially prepared for retirement*. Yet, despite these prevailing fears, about one-third of small-business owners have neglected to establish any type of personal or business-sponsored retirement plan. If you’re a small-business owner or self-employed, and you’re worried about retirement, there are a couple of simple ways you can begin planning for your future. An individual 401(k) or a SEP IRA would allow you to divert part of your income into a tax-deferred retirement account, and they aren’t overly expensive to establish.
There are two ways to contribute to an individual (solo) 401(k). In 2013, you can contribute up to 100 percent of your annual pay, up to the $17,500 annual maximum, as an employee. If you’re age 50 or older, the maximum you can contribute tax-free is $23,000.You can also contribute an extra 20 percent of your earnings as the employer, or 25 percent if the business is incorporated, and amount can even be deducted as a business expense. There is a cap on your total contributions for the year – $51,000, or $56,500 if you’re age 50 or older.
Small-business owners and self-employed workers can also make tax-deductible contributions to a SEP IRA opened in your name. In 2013, the contribution limit for this type of retirement account is 20 percent of your net earnings, up to the $51,000 annual maximum. Your contributions will almost always be tax deductible as a business expense, but consult your financial advisor for specifics on these rules.
Many ambitious people want to devote all of their energy to building a thriving business. However, taking a small amount of time right now to consider your retirement options will pay off in the long run. Setting up an account today will mean that your savings can begin to accumulate with taxes deferred, and ensures your overall financial health in the future.
* CNBC.com, August 22, 2012
**USA Today, March 1, 2012