Retirement Planning for Business Owners

Retirement Planning for Business Owners: Compare 401K, SEP-IRA and Pension plans.

For self employed and small business owners to be personally successful they must contribute to their retirement savings at some point during their business development.  Some will do it a bit at a time while others will wait until they generate large profits.  Regardless, you should ensure that you minimize your tax liability while contributing towards your ideal retirement.

How do most self-employed select between available retirement savings plan?  Sometimes this is a decision based on ease of use, other times on a lack of understanding or incomplete or misleading information.  Here is a tiny overview of the major retirement plans available: SEP-IRA, 401K, Pension plans.

The most popular retirement saving vehicle for the self-employed is the SEP-IRA.

In many cases, the 401K should be considered since it exceeds the SEP-IRA limits and provides other benefits.  On the surface, 2011 limits for both SEP-IRA and 401K appear the same (at $49K), so what is the difference?  The way the contribution is calculated provides the key to why you can defer more with a properly designed 401K plan.

On a $100,000 W-2 earned income in 2011 a business (Corporation) owner (less than 50 years of age) can contribute $41.5K to a 401K or $25K to a SEP-IRA.  Yet so many self-employed use the SEP-IRA.  The lower contribution maximum of a SEP-IRA guarantees higher taxes and lower chance of attaining a reasonable retirement living standard. In many situations the 401K is a planning vehicle that not only provides more tax-deferred contributions but can be a resource in an emergency.

Even so, a 401K is not the best retirement saving tool for all self-employed.

For some, a better tool is a self-employed pension plan.  Although a pension plan does require a great deal more planning it is by far one of the best tools available to small business owners with high company earnings.

Make informed decisions about your tax and retirement options.  These decisions should be product neutral and planned to meet your specific situation.

If you have questions – let me know.

Edi Alvarez, CFP®


What Legacy Will You Leave?

What Legacy Will You Leave?

Aviva Shiff Boedecker, J.D.

 Retirement plans are the most heavily taxed assets in most people’s estates because when heirs withdraw the funds, they must pay income tax, in addition to any estate tax that may have already been paid. By designating a charity, school, religious organization or other nonprofit as a beneficiary of your retirement plan, you can reduce or eliminate taxes, retain complete flexibility and control over all your assets, and leave a legacy that will have a lasting impact.

You and your heirs can avoid both income and estate tax on your retirement account when you give the remainder of the plan to one or more tax-exempt organizations and leave your heirs other, less-taxed property.

With a simple designation of beneficiary form, which is available from your plan administrator, and without impacting your own or your family’s security, you can make the gift of a lifetime.

For more information about making a flexible and tax-wise legacy gift to the organization(s) of your choice, contact Edi or Aviva.

Edi Alvarez, CFP®