Retirement Planning for Small Business Owners

As an entrepreneur, the old saying, “the buck stops with you,” rings true with anything involving your business. In the case of retirement planning, the responsibility of establishing a program that sets both you and your employees up for success is on your shoulders. For this reason, it’s crucial to understand what options are available to you and how the help of a professional is invaluable.

Unlike an employee, who’s often presented with a common plan such as a 401(k) or pension, business owners have several retirement vehicles to choose from. And, once you do retire, you also must decide how to withdraw from your business duties cleanly. This article will outline what goes into planning for retirement as an entrepreneur. You’ll learn about the types of retirement plans you can utilize, what challenges you may face, and how a financial advisor can help.

What Goes into Retirement Planning for Small Business Owners

No matter who you are, it’s imperative to begin planning for retirement as soon as possible. However, for business owners, you must take more of a hands-on approach to this process than an employee. It will be up to you to establish a retirement plan that aligns with both your and your employees’ needs, as well as work with an advisor to chart out your income sources once you stop working.

According to the U.S. Census Bureau, a small business is defined as any that ranges from $1 million to $40 million in revenue and 100 to 1,500 employees. Unlike large businesses, companies in this range may require less robust or simpler to maintain retirement plans, such as a SIMPLE or SEP IRA. If you run a small business, consider how much administration you can handle when establishing a plan for yourself and any employees you may have.

Generally, you’ll need at least 70% of your pre-retirement income to retire while maintaining a comfortable lifestyle. However, you should carefully consider what lifestyle you envision, whether traveling abroad or keeping life simple. For many, retirement income comes from several different sources, including:

• Your company’s retirement plan.
• Retirement from former employers, if any.
• Social Security – paid into by paying income or estimated taxes.
• Savings and investments in other tax-advantaged retirement accounts.
• Real estate – your home or any other properties you own.

Finally, you’ll need to consider what happens to your business once you retire. That is, do you plan to sell or are you going to be passing it down to someone else to run? These are complex decisions that often require the assistance of a professional to get right. Whatever you choose, however, it’s important to begin planning as soon as you can to avoid any undue stress for both you and the rest of your company.

Retirement Vehicles for Business Owners

As a small business owner, you have a wide variety of retirement vehicles available. Many of which allow you to establish one for your company and extend to your employees, if any. Since there isn’t necessarily a perfect one-size-fits-all option, what you choose should be most beneficial for your situation and comfort level when it comes to management.

Per the U.S. Department of Labor (DOL), businesses can establish three types of retirement plans:

• IRA-Based. These are tax-advantaged savings accounts that an employer/employee may fund and invest with. They’re easy to establish but have smaller contribution limits than other options, such as a 401(k).
• Defined Contribution. This refers to a profit-sharing or 401(k) program that contributes a set amount, either directly from the employer or a portion of an employee’s pay, to the account. Funds are then invested within the account to grow the principal over time. Unlike IRAs, these are more difficult to establish and require businesses to file an annual Form 5500.
• Defined Benefit. These are employer-sponsored pension plans that offer a guaranteed benefit to employees. Like a 401(k), these are difficult to establish and require the business to file an annual Form 5500. Additionally, the company must hire an actuary to come up with a number for annual contributions.

In the case of small businesses, establishing a full-fledged pension plan or, for some, a 401(k) may be too big of an undertaking. These require both time, money, and attention to establish. For these reasons, IRA-based plans or small business 401(k)s are often ideal. Below is an overview of common types of these plans and how they work:

SEP IRA

A simplified employee pension (SEP) IRA is a tax-deferred plan that lets business owners and employees save and invest for retirement. Employers are responsible for funding employees’ accounts. Then, the employee has full control over the money in the account, allowing them to invest in securities of their choice. Once they are age 59.5 or over, they may withdraw funds without penalty.

The SEP IRA plan is simple to establish, only requiring you to file Form 5305-SEP with the U.S. Internal Revenue Service (IRS) to be compliant. The program itself is run through a financial institution that offers brokerage services, such as Vanguard or Fidelity.

Keep in mind, however, that SEP IRAs don’t allow catch-up contributions. Additionally, you must begin withdrawing funds once you turn 73 years old, per the Secure Act 2.0.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax-deferred plan that allows both business owners and employees to contribute to a retirement account. Employees fund their account with a portion of their pay and employers may match up to 3%. Like with the SEP IRA, employees then have total control over the funds in their account, allowing them to invest in a wide variety of asset types.

SIMPLE IRAs are simple to set up and don’t require the business to file a Form 5500. However, for a company to qualify for the program, it must:

• Not have more than 100 employees with $5,000 or more in earnings in the previous year.
• Not currently have another retirement plan in place.

Accountholders may withdraw funds penalty-free once at age 59.5. The IRS requires minimum distributions at age 73, however.

Small Business 401(k)

A 401(k) is a defined contribution plan that an employer may establish for its employees. In this arrangement, both the employer and employee may contribute. Any company with at least one employee may establish a program.

Commonly, contributions to a 401(k) are tax-deferred. However, some firms may offer a Roth 401(k) option, which allows participants to deposit after-tax dollars. With either option, contribution limits equate to an annual limit set by the IRS or 100% of one’s compensation, whichever is less.

401(k)s are significantly more difficult to set up than an IRA-based plan. In most cases, the assistance of a financial advisor (or team of them) is necessary to ensure the program is properly set up and remains compliant with IRS guidelines.

Retirement Plan	Pros	Cons
SEP IRA	Easy to establish. High contribution limits. No required contributions, allowing for more flexibility. Earnings grow tax-deferred.	Only the employer may contribute. Required distributions begin at 73. No catch-up contributions.
SIMPLE IRA	Easy to set up. Both the employer and employee may contribute. Earnings grow tax-deferred.	Not all businesses may participate. Lower contribution limits than other plans.
Small Business 401(k)	High contribution limits. Both employer and employee may contribute. Often a pre- and after-tax option.	Difficult to set up.

What to Do with Your Business Once You Retire

It’s crucial to have a plan in place for what you decide to do with your business when you retire. For many, moving on from the company they’ve built for years can be highly emotional. But, with proper planning, you can ensure your business ends up in good hands and you get the value out of it that you deserve.

Unless you decide to simply close up shop, there are a few ways to exit a business once you retire. You may choose to sell your company, potentially giving you a large windfall going into retirement. Alternatively, you may pass down your business to a family member, friend, or close business associate. In this case, it may be possible to retain ownership while giving up your leadership role.

How a Financial Advisor Can Help

Planning for retirement as a business owner can require much more nuance than it might for an employee. Because of this, it’s highly beneficial to have a financial advisor by your side throughout your time as an entrepreneur. You should especially prioritize one with expertise in working with small businesses.

A high standard of ethics is paramount when you’re looking for a financial advisor to help with your business. It’s best to work with someone who strictly adheres to the fiduciary duty. This is one who avoids conflicts of interest and must always act in your best interest. Below are examples of professionals that fit into this category:

• Certified Financial Planner (CFP)
• Chartered Financial Analyst (CFA)
• Chartered Financial Consultant (ChFC)
• Certified Public Accountant (CPA)
• Certified Exit Planning Advisor (CEPA)

If you need help finding a high-quality advisor, we recommend you use this free matching tool. After filling out a short quiz about your goals, it’ll present you with up to three vetted professionals in your area.

Frequently Asked Questions

Do small businesses need to offer retirement plans?

Many states (25 as of 2024) require small businesses to offer a retirement plan for their workers. We recommend you consult with your state’s policies to ensure you stay compliant.

Do business owners pay into social security?

Yes, you pay into your social security through your estimated or federal income taxes. Once you retire, you may begin taking benefits. However, be aware that your payments will be smaller if you take them before you reach your full retirement age (FRA).

Can I establish a retirement plan if I have no employees?

As a self-employed individual, you may establish a SEP IRA for yourself to ensure you’re paying into a retirement plan. You’re also able to contribute to a Roth or traditional IRA, which shares many of the same benefits.