The Best Ways for Small Business Owners to Prepare for Retirement


By Meredith Wood of Fundera

When you work for a large company with an excellent 401(k) plan, you don’t have to worry too much about retirement. As long as you do your part in saving enough money, you should feel good about where you stand when you finally decide to call it quits.

As a small business owner, you’re in a unique position. You’re in position to enjoy the benefits of running your own company, but this doesn’t always work in your favor when it comes to saving for retirement.

Preparation Remains Important

If you keep your eyes on the news, you’ll soon realize that many people are coming up short in terms of retirement savings. As a result, they are unable to sustain their standard of living after leaving the workforce.

Small business owners wear many hats, but this is no excuse for overlooking the importance of preparing for retirement. By getting on the right track early and by taking the necessary steps, you will be ready to leave your business when retirement comes.

Best Options for Small Business Owners

It’s easy to make excuses, blaming your position as a small business owner on your lack of retirement savings. However, this won’t do you any good when you finally decide to retire. In fact, it’ll likely work against you, forcing you to work longer than you had originally planned.

The following retirement strategies have been successfully employed by many small business owners:

  1. Traditional or Roth IRA

Even though there are contribution limits associated with each type of IRA, they are important options to consider as a small business owner.

A Roth IRA, for example, has many benefits:

  • Tax-free income when you retire
  • Ability to contribute well into the future, even after you reach age 70 ½
  • No required minimum distributions

If a Roth IRA doesn’t suit your financial situation and saving strategy, a traditional IRA may be right for you. With this type of IRA, you can get relief on your current tax bill by taking a deduction for contributions made (on the flip side, any withdrawals you take after retirement will be taxed). If your tax bracket is high now but you expect this to change after retiring, a traditional IRA is likely the better choice. If you expect your tax bracket to be higher after retirement, a Roth IRA is likely the better choice.

No matter what you decide, make it a priority to learn more about the pros and cons of both types of IRA. Either one will allow you to successfully and efficiently save for the future.

  1. Solo 401(k)

Are you self-employed? Do you own a very small business? If you answered yes to either question, a solo 401(k) has many benefits when it comes to saving for retirement.

The primary benefits of this plan include:

  • The ability to contribute as both an employee and an employer. Once your employee contributions are capped, you can then have your business contribute up to another 20 percent of your total earnings.
  • An option for your spouse to set up a solo 401(k) plan if he or she works as an employee
  • Tax deductible employer contributions. If you make a contribution as an employer, it can be deducted as a business expense.
  • Flexible contributions. Unlike other types of plans, you are not required to contribute a set amount every year. If you earn less one year, you can cut back on contributions. If you earn more, you can contribute more.

Despite the many benefits of a solo 401(k) plan, there are details that could hold you back if you are not familiar with them:

  • More complicated than a traditional or Roth IRA. You will need a plan administrator to set up your account.
  • More reporting. This is not a concern early on, but it does come into play once you have a minimum of $250,000 in your account. At that point, the IRS requires you to report the benefits by filing form 5500.
  • More expensive. With an IRA, there are no costs associated with the plan. With a solo 401(k), you will pay an administrator to set up and maintain the plan.

As you can see, the benefits balance out the potential drawbacks, but it’s still important to be aware of all of them. It may take some time and money to set up this type of plan, but giving yourself the ability to save for retirement is what matters most.

  1. Develop an Exit Strategy for Your Business

An exit strategy may be the last thing on your mind right now, but the years have a way of flying by. Once your business is established and you are comfortable with the idea of sticking with it through retirement, you should focus on the finer details of an exit strategy.

There are two benefits of having a business exit strategy in regard to retirement:

  • It ensures that you have a way out when the time comes.
  • It puts you in position to sell your business, thus using the money to partially fund your retirement.

You’ll spend many years growing your business, serving clients, and hoping to provide employees (if you have any) with a stable working environment. Not every business can be sold, but many can.

Here are a few questions to answer as you prepare your exit strategy:

  • How can you prove that your business can be run without you?
  • Who else (maybe a partner) would be interested in owning the business?
  • What can you do to improve the value of the business?
  • Would it make sense to retain a partial stake in the business, as opposed to selling it entirely?

Tip: Don’t wait until the last minute to sell your business. For example, if you wait until a few months before you want to retire, your timeline could be thrown off track. You never know how long it will take to find a buyer, negotiate a deal, and handle all the necessary paperwork and documentation.

Help Is Available

Setting up and funding your own retirement account and determining an exit strategy are the best ways for small business owners to prepare for retirement. If you’re uncomfortable implementing your own plan or if you’re unsure what makes the most sense, consult with a financial advisor who specializes in assisting small business owners.

Regardless of the type of company you own or your current age, it’s critical to implement a plan that will allow you to save for retirement.

meredithwood1_smMeredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire