Retiring as a Small Business Owner | 5 Key Steps

Retiring as a Small Business Owner | 5 Key Steps

Planning for retirement as a small business owner comes with its own set of challenges, and the earlier you begin preparing for the transition, the better. Without a traditional employer-sponsored retirement plan, you’ll need to know your options for saving as well as ensure that you have a solid exit strategy in place.

We’ve outlined 5 critical steps to a successful small business owner’s retirement plan to help guide you through the process along with options for your retirement savings plans.


What Does Life in Retirement Look Like to You?

First and foremost, you need to know what you want your lifestyle to be in retirement. Only then can you determine if you have enough to retire independently of your business, or if you will need to rely fully, or in part, on your business for income in retirement.


Choosing the Right Retirement Plan

There are many retirement account plan options available to small business owners, each with different choices and flexibility, including who contributes, how much is contributed, what types of assets qualify, and the dates the plans can be drawn from.

As a small business owner, consider putting away as much as you can on a tax-advantaged basis by starting a defined contribution plan, such as a 401(k) plan or solo 401(k). At a minimum, at least consider contributing to an IRA-based plan, like a Simple IRA, SEP IRA (or possibly even a traditional IRA). Also, if you’re 50 years old or older, look into “catch up” contributions, which can allow you to save more.

Contact your trusted financial advisor to discuss structuring employer contributions and how to best take advantage of available contribution limits as well as determining appropriate investment advice for your situation.

IRA-Based Retirement Plans
There are two types of IRA plans that fall into this category for small business owners: SEP IRA and SIMPLE IRA. The SEP IRA plan is for self-employed individuals or employers who have at least one employee, and the SIMPLE IRA plan is for any self-employed individuals or employers with 100 or fewer employees. Each plan has different contributors and contribution amounts.

401(k) Plans
A self-employed business owner with no employees can choose a Self-Employed 401(k) plan, which is funded by the employer, but contributions cannot exceed $58,000 (in 2021). Additionally, the owner cannot take money from the plan until:

  • they turn 59 and a half years old
  • their plan is terminated
  • or there is another event that qualifies them to withdraw without penalty

Investment-Only Account
Any self-employed person can create an investment only account, though the contributions will be determined by the trustee. Those who have a qualified plan but want to further their investments should consider this type of account. Speak to a tax advisor or financial planner to learn more about plan details, contribution amounts, and tax benefits.


Conduct a Thorough Business Valuation

Appraising the value of your business, assets, and investments can be a daunting task, and overestimating the value of your business is a common mistake small business owners make. Conducting a thorough and proper business valuation is critical to your plans for retirement.

As an owner, if you are expecting a certain amount of money from selling your business to provide for any expenses after retirement, how will you make up the gap if your business sells for less? The same goes for your assets and investments, all which require an appraisal during this process, because if the investments are unlikely to produce the income needed, you will need to make adjustments.

The valuation process analyzes all aspects of the business, which includes the company’s management, capital structure, future earnings, and the market value of its assets. In the U.S., business valuations are often carried out by a professional who is Accredited in Business Valuation (ABV). This certification, awarded by the American Institute of Certified Public Accountants, is given to CPAs who pass an exam and meet minimum standards set by the AICPA. These professionals should work closely with your trusted financial advisor to determine the appropriate valuation you’ll require when planning for your retirement.


Planning Your Exit Strategy

For small business owners, transitioning into retirement means deciding what will happen to your business when you’re ready to stop working. Whether you decide to sell it or not, you’ll need to prepare your business to operate without you there. Many factors will contribute to your decision, as this business you’ve worked so hard to build may be your largest asset. If you plan to use it to fund your retirement and to stop working as well, you will likely need to liquidate your investment.

If you decide to sell your business, you need to take steps to make it an appealing investment for potential buyers. There are many ways to do so, including increasing your profit margins, implementing more efficient systems, and documenting all of the key roles. Working with an advisor to outline these steps and implement a solid action plan can help make the process both smoother and more profitable in the long run.

If instead you have children or other family members who want to take over the business, things get a little more complicated. You may need to find the right balance between extracting enough value for your retirement and not burdening them with too much debt. This is the perfect time to start discussing intergenerational wealth planning with a professional wealth manager. Involving your kids and family early on in the planning process allows more time to find equitable solutions that work best for your legacy.


Avoid the Penalties! Timing is Everything

Not knowing the penalties for drawing from your retirement plan too early is a quick and easy way to make your retirement funds drop in value. Whether your plan charges a penalty fee for early withdrawal or simply loses principal/interest, it’s critical to your retirement income planning to know the ins and outs of your specific plan.

Avoid accessing your funds until you qualify, or face the penalties associated with early withdrawal which can include loss of tax benefits as well.


We’re here to help.

The sooner you start planning for your retirement, the easier it will be to clear a path to the future you envision for yourself and your family. Putting off retirement planning has the potential to put both your personal future and your business at risk. We are here to help you identify what you need to do to reach your retirement goals and how to handle your business in retirement. Give us a call today or schedule an appointment to talk to an advisor, and let’s get started on the future together.

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