If you’re a small business owner, you’re probably used to reinvesting profits, handing payroll, and juggling day to day operations. What happens to the business when you’re ready to step away? Unlike employees with employer sponsored 401(k)s or pensions, many entrepreneurs delay retirement planning, assuming they’ll sell the business or just keep working.
But that can be risky….
The good news? You can design your business to work for you in retirement. Let’s explore how.
Start With the Right Retirement Account
The IRS offers several tax-advantaged retirement plans designed specifically for business owners. The following are 3 popular options:
- SEP IRA (simplified employee pension plan)
- Easy to set up and administer
- Contribution limits are high, up to 25% of your compensation or up to a maximum of $69,000 for 2024
- Great for solo owners or for those with few employees
- Learn more at the IRS SEP IRA overview
- Solo 401(k)
- Perfect for business owners with no full-time employees other than their spouse
- Allows you to contribute as both an employer and employee, up to $69,000 in 2024 or $76,500 for 50+
- Offers Roth and traditional options
- Defined Benefit Plan
- Works like a pension
- Ideal if you want to contribute large amounts pre-retirement (often over $100,000/year)
- Requires ongoing actuarial administration but offers strong tax savings
Use Life Insurance to Create Tax-Free Retirement Income
One often overlooked strategy is permanent life insurance.
Here’s how it works:
- You pay premiums with after-tax dollars
- Cash value grows tax deferred and can be accessed tax-free in retirement through loans
- No market volatility (does not lose value when markets are down, safe)
- Offers a death benefit which also provides the family additional layer of protection
Many savvy business owners use this as a “private pension”, and unlike traditional retirement accounts, there no IRS contribution limits.
Want more information? Contact Brightside Financial for a consultation on how permanent life insurance can not only provide protection for your family but provide cash value which can be used as leverage to grow your business and/or use for tax-free retirement funds.
Make Your Business Sale-Ready (Even If You Never Sell It)
For many entrepreneurs, their business is their biggest retirement asset. But unless it’s ready to sell, or run without you, you may not get what it is worth.
Ask yourself the following questions:
- Could someone else step in and operate it tomorrow?
- Are your processes and policies documented?
- Is your customer base diversified?
Not sure? You can hire a business valuation expert or consult with a Certified Exit Planning Advisor (CEPA) to understand your options.
Even if you do not sell, a systemized business can generate passive income while you step back.
Don’t Foret Your Spouse and Family
Consider how your spouse factors into your business:
- They may be eligible for retirement contributions through payroll
- Life insurance ensures your family won’t suffer financially if something happens to you
- Plan for business succession, who can take over if you become ill, disabled or pass away?
Work with a Retirement and Insurance Professional Who Specializes in Business Owners
Retirement planning is not a one size fits all. You need a specialist who understands:
- How to balance reinvesting in your business vs. saving outside of it
- How to reduce taxes now and later
- Which strategies offer liquidity, control and protection
Final Thoughts
Your business may be your life’s work, but making it your sole retirement plan is risky. With the right mix of retirement accounts, life insurance, and long-term planning, a tax-advantaged income stream is possible allowing you to retire confidently.
Need help designing a retirement plan? Brightside Financial specializes in working with business owners to design a retirement plan which is optimized to keep more of your hard-earned money and last a lifetime. Contact Brightside Financial to schedule your consultation today.
Here are some other previous blogs we’ve put out on this subject:
How to Legally Reduce Your Taxes Like the Wealthy Do
Boost Your Family’s Wealth With a Properly Structured IUL
Secure Your Future Amid Economic Volatility – Tax Free Retirement
