- Self-Directed Accounts
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Self-Directed IRA Concepts
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:
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.
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.
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Contributions to a SEP are tax-deductible and compound tax-deferred until withdrawn, pending that the distribution is taken after the account holder reaches 59½ years of age.
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 With a SIMPLE plan, contributions are tax-deductible and compound tax-deferred until withdrawn, pending that the distribution is taken after the account holder reaches 59½ years of age.
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:
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:
Each account has specific requirements and offers different benefits to different types of small businesses. Access a more detailed comparison of the accounts.
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.
What types of accounts does Equity Trust hold?
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