Retirement Planning for Business Owners

retirement planning

Looking to de-stress your retirement planning? Who isn’t? Start planning today in order to retire comfortably. Tax free compounding is the magic ingredient for early retirement planning. Another advantage is tax deductions, which are basically long term loans from the government without interest. Moreover, you don’t pay back the loan until decades from now. Thus, imagine all the things you can do NOW with all that money.

It is never too late to start. One of the most popular retirement plans is the basic 401(k). Since you are a business owner, just think of a 401(k) plan as an investment. You’re paying yourself first so you can ensure a quality of life in your golden years.

How to start contributing to your retirement plan?

According to the law, a 401(k) plan has a contribution from each the employee and the employer. Once upon a time, you may have worked in a cubical as an employee and contributed to a 401(k) plan. While in that cubicle, your employer enticed your salary benefits by “matching” your contribution to the 401(k) plan. If you thought you were getting a deal then, take a look at the perks now.

For some businesses, the owner is considered an employee in business and the business entity is the employer.  Because 401(k)s are tax-advantaged, they have a maximum annual contribution set by the IRS each year. The 2017 limit for an employee contribution is $18,000 per year from your salary. If you are over the age of 50, your limit increases to $24,000 per year. 1

If you decide to invest in your 401(k) as the business entity (think employer), there are some things to remember:

  • The limit for the employer is 20% if you are a proprietorship or 25% of salary if you are a corporation.
  • The investment cannot exceed over 100% of your salary.
  • The total investment is capped off at the dollar amount of $54,000 if you are under the age of 50 years. If they are 50 years or older, the limit is $60,000.1

Why is retirement planning valuable for a business owner?

Just like any planning, if you start early, you gain the most benefit. Compounding interest accumulates on your investment amount. Moreover, the government puts strict tax penalties to prevent you “dipping into” your retirement nest egg. The money you put into your traditional 401(k) plan is “tax deferred”, meaning you only pay tax on it when you withdraw from it.  However, in the case of a ROTH 401(k) plan, you’ll be taxed now but earnings are never taxed.  More importantly, you will gain a tax deduction for your company based on the amount of money your company invests in the plan.

Adding Employees To Your Business

As your business grows, it is likely that you’ll hire employees. This will directly affect your retirement planning. If your company employs workers, your plan must cover employees who are over 21 years old that exceed 1000 hours during the year. Just remember that you might need additional plans if your company plans to match employee contributions. Therefore, as your company grows, speak with your financial advisor to determine the best way to add benefits to your employees while still gaining tax benefits for your business. 2017 RC TL Certificates-Paragon Acctg

Paragon Accounting & Tax Solutions specializes in small business in Milton, GA; Acworth, GA; Canton, GA; Woodstock, GA; Marietta, GA; Alpharetta, GA; and Kennesaw, GA. Your business success is important to us and we want to help you take advantage of every available tax benefit.