You will retire–make sure you have a retirement plan!
As much as you may love being your own boss and nurturing your business, don't fool yourself about one thing – the day will come when you will either want to retire or be forced into retirement. Because you cannot predict when either one of those will occur, it's imperative to set up a retirement plan for yourself, even it it means having to scrimp a little harder to make your business a success.
…just like health insurance, a retirement nest egg sure comes in handy…
Retirement plans are kind of like health care plans: There aren't a lot to choose from, and none of them are perfect. But just like health insurance, a retirement nest egg sure comes in handy when the day arrives that you really need it. Here are the your basic retirement plan options:
A SEP IRA
The good ol' Individual Retirement Arrangement is perhaps the least complicated way to go, and the government has created a special one designed for small businesses that is less burdensome to administer and involves fewer costs to you. The simplified employee pension (SEP IRA) lets you contribute up to 25 percent of your net self-employment income as pre-tax savings; there's a maximum amount you can save that often changes year to year.
A SEP-IRA offers you a lot of flexibility, depending upon how much you make in any given year, and you can set it up if you start your business on the side while still working for an employer who's contributing to a 401(k) for you. The SEP doesn't work as well if you start to add employees beyond your spouse.
The most popular type of retirement plan, the 401(k) has a solo version that works well for self employed folks. You can defer part of your income either pre- or after-tax into this account. The coolest feature of the 401(k) is that it offers very generous contribution limits. It lets you contribute money as an employee and as an employer, and if you are 50 years of age or older, you can kick in even more.
The 401(k) allows you to build up your retirement stash quickly. You can roll any 401(k) savings from another job into the new one. Fees are low or sometimes waived. You can put in a lot or nothing each year, depending upon your financial situation. You can even borrow against it, although that sort of defeats the purpose of a retirement account. This one is limited to you and your spouse, so while it's great for the mom-and-pop biz, once you get employees, you'll want to shop for something else to cover employees.
The SIMPLE IRA or 401(k)
Yes, it's true, someone is paid to sit around and think up these acronyms. But in this case, it was a job well done. The “savings incentive match plan for employees” is an IRA created just for small businesses and the self-employed. It's really set up more for the business with a handful of employees, because it requires a bit of accounting skill to manage it. The basic process for a SIMPLE plan is that an employer can make contributions to an employee's account, and the employee can also elect to make salary reduction investments in the plan. There are SIMPLE IRA and SIMPLE 401(k) plans that have slightly different structures and applications.
There are limits on the amount one can contribute to SIMPLE, but the limits are round numbers, not percentages of income. The contributions are tax deductible, and your nest egg is tax deferred till you start taking it out after retirement. If you do have some employees, it's an attractive perk, since many small businesses don't offer much in the way of a retirement plan.