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Investor Insights Blog|3 Small-Business Myths Business Owners Need to Stop Believing…

SDIRA Concepts

3 Small-Business Myths Business Owners Need to Stop Believing…

If you run a small business, you may have a long-term plan in place that includes an exit strategy and takes into account the tax burden you expect to face each year.

But what if you’re paying more than you need to, and will actually have less money than you think when it comes time to retire?

Before you pay more than you need to or put your financial future in jeopardy, be aware of three myths that could cost you:

Myth 1: You’ll sell your business when you’re ready to retire

Myth busted: Selling your business is not guaranteed.

Many small-business owners are content with no formal plan for retirement aside from selling their business when they’re ready to hang it up.

This plan could potentially backfire.

As a recent Forbes article points out, few business owners receive the price they expect for their business when it comes time to sell.

According to Wealth Management, in 2013, 12 million boomer business owners were getting ready to retire and flood the market with businesses for sale. 5 years later, however, only 25% of companies were actually sold at asking price.

If you’re expecting to live off the sale of your business, but the handoff doesn’t meet your expectations, you’re left to decide whether to reduce your asking price or shut down and continue working elsewhere.

Myth 2: A small business-owner can’t have a retirement account

Myth busted: There are several retirement savings options for those who own their own business.

So, if you can’t count on selling your small business, and you don’t work for an employer that offers a 401(k), what are you supposed to do to prepare for retirement?

Many small-business owners aren’t aware that there are retirement plans designed for them. The SEP IRA, SIMPLE IRA, and Solo 401(k) are options for those who own their own business.

Here’s a breakdown of each small-business plan:

1. SEP – Simplified Employee Pension (SEP), is designed for self-employed individuals or small businesses with less than 25 employees. The SEP allows for pre-tax contributions toward retirement without getting involved in a more complex qualified plan such as a 401(k).

Contributions to a SEP are tax-deductible and compound tax-deferred until withdrawn, pending that the distribution is taken after the account holder reaches 59½ years of age.

SEP Advantages:

  • Less complex and costly than a 401(k)
  • Allows you to contribute larger amounts
  • You may qualify for larger tax deductions

2. SIMPLE – Savings Incentive Match Plan for Employees (SIMPLE) is a plan for small businesses, typically with 100 or fewer employees, that have no other retirement plans. With a SIMPLE plan, contributions are tax-deductible and compound tax-deferred until withdrawn, pending that the distribution is taken after the account holder reaches 59½ years of age.

SIMPLE Advantages:

  • Less complex and costly than a 401(k)
  • Contribution limits are higher than individual retirement accounts and grow tax-deferred, without being subject to capital gains or income tax
  • Employees are always 100-percent vested in (or, has ownership of) all SIMPLE IRA money

3. Solo 401(k) – The Solo 401(k) is for sole proprietors and offers the same benefits of the 401(k), but it is designated for businesses in which only the owner (and their spouse) is an employee.

Solo 401(k) Advantages:

  • Specifically designed for the individual business owner
  • Higher contribution limits for tax-advantaged retirement investing
  • Opportunity to maximize contributions through employee and employer contributions

4. Roth Solo 401(k) – The Solo 401(k) has the option to be set-up with the added benefit of Roth IRA-like tax-advantages. Contribution limits are the same, but you designate them as Roth contributions. Those contributions won’t be eligible for a tax deduction, but qualified withdrawals from the Roth Solo 401(k) are tax-free.

Roth Solo 401(k) Advantages:

  • Investments can compound tax-free
  • Higher contribution limits for tax-advantaged retirement investing
  • Opportunity to maximize contributions through employee and employer contributions

Each account has specific requirements and offers different benefits to different types of small businesses. Access a more detailed comparison of the accounts.

Myth 3: High taxes are an unavoidable part of doing business

Myth busted: You could receive potentially sizable tax deductions and credits because of your status as a small business owner.

With the retirement plans explained above, you could claim as much as $57,000 in tax deductions in 2020.

Contributions you make to the small-business retirement plans (except for Roth contributions) are tax-deductible, which means potential deductions of as much as $57,000, which is the maximum contribution of the SEP IRA in 2020. (Click here for more information about plan contribution limits and deductions.)

With any of the plans, earnings grow tax-deferred, and you may be able to deduct employer contributions as a business expense.

In addition, you may be able to take advantage of a $5,000 annual federal tax credit offered to employers during the first three years of establishing a retirement plan. This is designed to help offset administrative fees. (The credit was $500 per year, but increased due to passage of the SECURE Act.)

There are several other tax deductions available to small business owners as well. As always, consult with your tax or financial professional to determine your best course of action.

To discover more about options for securing your financial future and potentially saving in taxes, view our guide to small business retirement accounts.

1

What types of accounts does Equity Trust hold?

Equity Trust holds a variety of IRAs, as well as other self-directed accounts, including:

  • Traditional IRA
  • Roth IRA
  • Simple IRA
  • SEP IRA
  • Solo 401(k)
  • Roth Solo 401(k)
  • Health Savings Account (HSA)
  • Coverdell Education Savings Account (CESA)

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