Their Own Worst Enemies
Derek Ferriera and Martin Johnson
Posted: 8/3/2010
One of the traits that characterize most successful entrepreneurs is exuberant optimism in the face of tremendous odds. While this attribute is critical for business success, it can portend disaster as small-business owners prepare for retirement.
A common problem among entrepreneurs can be overcoming their drive to “do it all”. In addition, entrepreneurs’ enthusiasm to embrace risk can short-circuit their retirement plans, since some may be prone to making risky investment decisions.
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Mapping out a Plan
While some retiring entrepreneurs are loath to give up any control of their money, many can benefit from outside financial expertise. By bringing financial and legal advisors in early can help small-business owners plan their transition into retirement.
However, that sort of forward thinking isn’t necessarily the norm.
Fortunately, this doesn’t prevent a fruitful working relationship. What it requires, however, is an understanding of how entrepreneurs think and the level of involvement they want to have. In other words, it’s important to expect—and respect—a small-business owner’s need to be involved in investment decisions.
Once the parameters of a good collaboration are set—and trust is built on both sides—the relationship between an advisor and a retiring (or recently retired) entrepreneur can be extraordinarily satisfying for both.
Plan Options
There are several retirement plans that are specifically tailored for small-business owners.
They vary in how much money can be contributed, whether employees other than the owner may participate, what (if any) contributions the employer must make on behalf of employees, what deadlines there are for putting money into the plan, and how hard it is to operate the plan. Among the options are SIMPLE IRAs, SEP IRAs, profit-sharing plans, SIMPLE 401(k) plans, and single-participant 401(k) plans.
- SIMPLE IRA or Savings Incentive Match Plan for Employees. This plan is ideal for employers with fewer than 100 employees. Here, the owner and any employees can save up to $11,500 a year, indexed for inflation, of their own money. If an employee is over 50, an additional “catch-up” amount of $2,500 is allowed. The employer must generally either contribute an additional 2% of each employee's compensation to the plan or match 100% of each employee's contribution up to 3%.
- SEP IRAs. The Simplified Employee Pension IRA is significantly different from SIMPLE IRAs. The key difference is that the employer funds the SEP IRAs entirely. The employer is allowed to contribute an amount not to exceed the lesser of 25% of the employee’s compensation, or $49,000 (indexed for inflation each year).
- Profit-Sharing Plans. These plans are generally all employer-funded. Employer contributions are flexible and limited to an amount not to exceed the lesser of 25% of the employee’s compensation, or $49,000 (indexed for inflation each year).
- SIMPLE 401(k). These plans share many similarities with SIMPLE IRAs. The same 100-employee limit applies, as does the $11,500 limit on employee contributions. The employer must match up to 3% of the employee's contribution, or make a non-elective contribution of 2% of compensation for each eligible employee.
- Single-Participant 401(k). These plans enable business owners without employees (other than a spouse) to take advantage of the higher limits that 401(k) plans allow. By using a single-participant 401(k) plan, a business owner can choose to save $16,500, plus an additional $5,000 for owners over 50 years of age. In addition, the business can make a tax-deductible employer contribution on the owner's behalf of up to 25% of compensation. The total contributions cannot exceed $49,000, indexed for inflation each year.
Withdrawals from most tax-deferred retirement plans are taxed as ordinary income and, if taken prior to age 59 ½, may be subject to an additional 10% federal tax penalty and possibly state income taxes.
www.mycsolutions.com
Derek Ferriera CFP(r), CLU, CHFC, REBC and Martin Johnson are registered representatives of Lincoln Financial Advisors Corp., a broker/dealer, member SIPC, and they offer investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.
Derek Ferriera CA Insurance License # 0665169
Martin Johnson CA Insurance License # 0B69397
CRN 200902-2026215
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