Choose a Traditional Retirement Strategy

Dec 01, 2023 By Triston Martin

There are some traditional options available to you in addition to selling your small business to fund your retirement, such as individual retirement accounts (IRAs) and 401(k) plans, which can serve as additional sources of income during retirement in addition to selling your small business.

Establish a SIMPLE IRA

One kind of retirement plan accessible to small companies is a SIMPLE IRA, which stands for savings incentive match plan for workers. Employees can defer up to $14,000 of their pretax earnings in 2022; this amount will increase to $15,500 in 2023. Those 50 or older may take advantage of a catch-up contribution of $3,000 and postpone as much as $17,000 from their income tax. By 2023, the catch-up contribution will have increased to $3,500, bringing the total amount that individuals aged 50 or older may defer to $19,000. Nevertheless, workers participating in others employer-sponsored plan can only contribute a maximum of $20,500 across all employer-sponsored plans combined (this amount will increase to $22,500 in 2023).

The maximum amount that an employer may contribute to an employee's SIMPLE IRA as a matching contribution is 3% of the employee's annual salary. On the other hand, employers are permitted to pay up to 2% of the total remuneration paid to qualified employees, which is capped at $305,000 in 2022 and will increase to $330,000 in 2023. Employer donations are tax-deductible.

Set up a SEP IRA

Simplified employee pensions, often known as SEPs, are an alternative form of individual retirement accounts (IRAs) open to contributions from small company owners and workers of such businesses. It allows workers to make pretax contributions of up to 25% of their income or $61,000, whichever is less. This benefit will be available to employees beginning in 2022. Before beginning to take distributions from the retirement program, employees do not have to pay taxes on the sums an employer contributes on their behalf until they reach retirement age.

A SEP may be established by almost any kind of small company. It makes no difference how few workers you have or whether your company is organized as a sole proprietorship, partnership, corporation, or nonprofit organization; all of these factors are irrelevant. You can choose how much to pay on behalf of your workers annually, which means that you are not obligated to contribute even if your company has a poor year financially. Owners of the company are also regarded as workers and can make employee contributions to their accounts as part of their employment status.

IRAs and Solo 401(k)s

You may need to provide a retirement plan for your employees if you operate in a highly competitive industry and want to recruit the most qualified individuals. Nevertheless, there is no legal need for businesses to provide their staff with retirement benefits. If you do not, you may save for your own retirement without engaging your workers by contributing to either a Roth or traditional individual retirement account (IRA). Contributions can be made to either kind of IRA by anybody with income from employment.

You also can make contributions to an IRA on behalf of your partner. Contributions to a Roth IRA are made with money that has already been taxed, whereas contributions to a traditional IRA are made with money that has not yet been taxed; nonetheless, withdrawals from a traditional IRA are subject to taxation. In 2022, the maximum amount that may be contributed to an IRA is $6,500, or $7,000 if the account holder is 50 years old or older. For the tax year 2023, these restrictions will be raised to a maximum of $6,500 and $7,500, respectively.

Develop an Exit Strategy for Your Business

When you start thinking about saving for retirement, one of the first things you should do is work on an exit strategy for your firm. This may seem counterintuitive. But here's something to think about: the little shop you've spent your whole life erecting might be your most valuable possession. You will need to liquidate your investment if you want it to support your retirement and allow you to quit working altogether. To have your small company ready for sale someday, it has to be able to function without you there to run it. It is never too early to begin thinking about how to achieve that objective and how to locate the ideal buyer for your small company. Both of these things should be on your mind constantly.

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