4 401(k) Retirement Plan Tips for Small Business Owners

Small business owners have a lot on their plate, from running their business to hiring and managing staff to keeping an eye on the competition.

But although they are expert jugglers and multitaskers, there is one skill that most small business owners can improve on: making the best use of their own 401(k) retirement plans.

In fact, according to one study, 34 percent of small business owners do not have a 401(k) retirement plan or any retirement savings for themselves. That leads to 40 percent of these owners lacking confidence that they will be able to retire before the age of 65.

So how can you buck the trend and jump-start saving toward your 401(k) retirement plan or other individual retirement plan (IRA)? Here are our four key tips for small business owners to keep in mind when planning for retirement.

1. Know your number.

As a small business owner, you are likely a wizard at reconciling your balance sheet every month for your business and calculating your ROI for your upcoming investments. You can use those skills to figure out how much money you’ll need for a comfortable retirement.

To get started thinking about how your spending may go up in some areas but down in others, ask yourself questions such as:

• Where do I want to live, and what is the cost of living there?
• What are my sources of retirement income? How much have I already saved?
• At what age do I want to retire?
• What other experiences do I want to have during retirement?
• What are my potential fixed costs (e.g., living expenses, healthcare)?

Answers to these questions will help you get an idea of what your monthly expenses may add up to, which you can then project annually and for the length of your retirement. This number will be your target retirement saving goal, which you can use to evaluate your progress.

2. Pay yourself first.

It can be tempting to continue to pour all of your profits and extra income back into your business, but you need to think about investing in yourself and your future, too. Some business owners plan to sell their business or retain an income from it as a retirement plan, but it is unwise to count on this without any contingencies.

Instead, set up automatic withdrawals from your income so that saving toward your own retirement plan becomes automatic, much like your other labor costs.

3. Know your options.

Once you know your savings goal and have a plan to either start or increase your contributions toward it, you need to evaluate your investment options. Because you are a small business owner, you do have some additional choices to help guide you:

Solo 401(k)

Solo 401(k) plans have similar rules and requirements to any other 401(k) plan, but the business owner is both the employer and the employee covered by the plan. Elective deferrals of compensation and employer nonelective contributions, with limits, are available.

SEP IRA

Simplified employee pension (SEP) IRAs are available to a variety of small business types and offer the self-employed business owner the ability to save as much as 25 percent of their net income, much more than the traditional IRA limit. Unlike other plans, however, only employers can contribute.

SIMPLE IRA

According to the IRS, a savings incentive match plan for employees (SIMPLE) IRA plan “allows employees and employers to contribute to traditional IRAs set up for employees,” which is a perfect way for small businesses to kick-start their employees’ savings. In 2021, employees can contribute up to $13,500 to a SIMPLE IRA account.

Roth or Traditional IRAs

Small businesses owners can also choose to open up their own traditional or Roth IRA plan, following the usual IRA guidelines regarding how much you can contribute and how and when it is taxable.

Traditional 401(k) Retirement Plan

Finally, once a business reaches a certain size, it can offer its own traditional 401(k) retirement plan for their employees. Depending on the plan and investment options, businesses can open a traditional 401(k) for as few as 20 employees.

4. Partner with a personal financial professional.

Small business owners face plenty of questions, complexities, and implications each step of the way when it comes to retirement planning.

If you are feeling a bit overwhelmed, just remember that you do not have to go it alone. Look for a financial advising team that shares your values, has diverse services, and has proven tools and experience to guide you on your financial journey.

Expedite your retirement savings plan.

Ready to take the next step and accelerate your personal financial planning? 

The team at Harvest Wealth Group would welcome the opportunity to get to know you and your goals and help you own your financial journey.

If you are ready to get started, you can contact our team here. You are also welcome to download our free resource, What Should I Do with My Old 401(k) or Employee Plan?