Retirement Planning for Business Owners

Employee-Established Retirement Vehicles

For business owners, retirement planning can be challenging, but don’t worry, we’ll break it down into manageable pieces.


Individual Retirement Account (IRA)

Think of an IRA as your personal retirement piggy bank. There are two main types:

  • Traditional IRA: With a Traditional IRA, you contribute pre-tax income and then pay taxes when you withdraw in retirement. This can be a smart move if you’re currently in a higher tax bracket.
  • Roth IRAs: Roth IRAs are funded with after-tax income, but the sweet deal here is that your withdrawals in retirement are tax-free.

The contribution limit for IRAs in 2024 is $7,000, or $8,000 if you’re over 50. Just remember, if you dip into this account before age 59.5, there’s a 10 percent penalty, except for special uses, such as a first-time home purchase​.

Defined Contribution Plans

Imagine a defined contribution plan as a garden where you plant retirement seeds and watch them grow. With these plans, like 401(k)s, employees contribute a part of their paycheck pre-tax. Some companies match a portion of what the employee puts in—offering free money growing alongside employee contributions.
The contribution limits here are higher than those for IRAs—up to $23,000 in 2024, plus an extra $7,500 if you’re 50 or older.

Defined Benefit Plans

Also known as pension plans, defined benefit plans are like a promise from a company to pay a specific amount in retirement and are usually based on your salary and years of service. While less common now, they offer the security of knowing exactly what you’ll get when you retire.

Retirement Planning for Business Owners with an Existing Plan

If you’re a business owner with an existing retirement plan, you should stay informed about how to optimize or correct it for the benefit of your employees and your business. Below are some key points to consider.

Retirement Plan Correction Programs

Compliance mistakes happen, but the good news is there are ways to fix them. The IRS has provisions for making corrective distributions and contributions. For example, if your plan pays benefits in excess of the proper amount, you’ll need to address this either by recouping the overpayment or having the employer or a third party reimburse the plan.

Automatic Enrollment to a 401(k) Plan

Automatic enrollment can be a game changer for increasing participation in your 401(k) plan. It means employees are automatically signed up for the plan unless they opt out. This approach helps ensure that more employees are saving for retirement and also helps keep your company in line with plan testing requirements. There’s even a $500 tax incentive for businesses that include auto-enrollment provisions in their 401(k) plans, which could save your business money over time​.

Retirement Income and Transition Strategies

When planning for retirement income, you should consider how you’ll transition from accumulating savings to withdrawing savings. This involves:

  • Strategic planning around when and how to start drawing income from your retirement accounts.
  • Possibly adjusting your investments as you get closer to retirement.

Tax-Efficient Withdrawal Strategies

As you transition into retirement, start thinking about how to withdraw from your retirement accounts in a tax-efficient manner. This involves:

  • Understanding the tax implications of withdrawing from different types of accounts (like 401(k)s, IRAs, Roth accounts, etc.).
  • Strategizing the order and amount of withdrawals to minimize tax liabilities.

Vesting in Employer-Sponsored Retirement Plans

Vesting in employer-sponsored retirement plans is like a loyalty program for work tenure. It determines when employees truly “own” the employer’s contributions to the retirement plan. If an employee leaves the company prior to being fully vested, some of all of the employer’s contributions to their account will return to the company.

There are a few types of vesting schedules:

  • Immediate Vesting: Employees are fully vested right away, meaning all the employer contributions are guaranteed to the employee from the start.
  • Graded Vesting: Employee ownership increases gradually over time, say 20 percent each year over five years.
  • Cliff Vesting: Employees have no vesting of employer contributions until a fixed length of time, such as three years, and then they become fully vested.”

Our Financial Planning Process

Our personal financial planning process is designed to let us get to know each other. We believe the success of a financial plan is built on a foundation of trust between a client and their financial advisor. That’s why we strive to learn everything about your current financial situation, your financial goals, and even some things you may not think are relevant but can greatly influence how you make financial decisions—such as your beliefs, attitudes, and values.

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Matching Contributions and Advantages

Matching contributions in an employer-sponsored retirement plan, such as a 401(k), is a bit like a company offering a bonus to employees for saving for their future.
Here’s how it works: When employees contribute a portion of their salary to a retirement plan, the employer might add a matching amount. This match is often a percentage of what the employee earns in a year, up to a certain limit.
For instance, an employer might match 100 percent of employee contributions up to 3 percent of their salary and then 50 percent of the next 2 percent of compensation.
For the employee, this is a great incentive to save more. Depending on the specific provisions of the retirement plan, these matching contributions may be elective or non-elective to the employer.

Types of Small Business Retirement Plans

A. Solo 401(k)

  • Employee Eligibility: This plan is for self-employed individuals with no employees other than a spouse.
  • Contribution Limits: Regardless of company profit, you can contribute up to $23,000 in 2024, plus a $7,500 catch-up if you’re 50 or older, as the “employee” of the company. Additionally, your contributions can be made up to $69,000 (before the catch-up) using a profit calculation.
  • Benefit Determination: Your retirement benefit depends on your contributions and how well your investments perform.
  • Risk Allocation: You wear the captain’s hat here, deciding where to invest.
  • Vesting: It’s all yours immediately—no waiting period.

B. Defined Contribution Plans

  • Small Business 401(k): This plan is for businesses with employees and offers high contribution limits and optional employer matching.
  • Profit-Sharing Plans: Profit-sharing plans allow discretionary employer contributions with benefits based on the company’s profits.
  • SIMPLE-IRA: Ideal for businesses with fewer than 100 employees, these plans require employer contributions.
  • Safe Harbor 401(k): Similar to the standard 401(k), but this plan mandates employer contributions that are immediately vested.
  • 403(b) Plans: Designed for employees of tax-exempt organizations, mirroring many 401(k) features.
  • Employee Stock Ownership Plans (ESOPs): These grant employees ownership in the company. The benefit depends on the company’s stock performance.

If you’re ready to begin taking the steps you need to achieve financial success, then give us a call. We look forward to hearing from you.

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