Owning and operating a small business is a popular trend in the U.S. According to a report, more than 28 million small businesses operate in the country out of which, 22 million are self-employed, with no additional employees.
When it comes to self-employment, a lot of people consider financial independence as one of its biggest perks. However, not all the small business owners pay enough attention towards saving for their future. A survey conducted by BMO Wealth Management found that three-quarters of small business owners had retirement savings below $100,000. Financial obligations of the business often come in the way of retirement savings. The good news is that there are saving options that can help them achieve financial freedom while having the authority to take their investment decisions, such as a self-directed Solo 401k plan.
How Your Small Business Can Set You Up for Financial Independence?
As a small business owner, you will always have multiple priorities competing for your financial resources. The key is to lay down a plan that you can follow.
- Pay yourself first: Unlike what you have been doing until now, start paying yourself first, which means your retirement contributions are the first to take a bite out of your monthly intake. Find out the areas that you’re overspending on and streamline your business to become cost effective.
- Auto deductions: Set up a checking account that automatically deducts a pre-defined sum of money from your business account. It will allow you to have sufficient money when making the annual contributions.
- Setup a succession plan: While a lot many small business owners talk about succession, very few of them actually have a plan for it. Seek expert help and get people onboard that can run your business successfully, even when you’re retired. Having a strong succession plan and management team makes your business an attractive purchase for a potential investor.
Choose a Retirement Plan that Offers Investment Freedom
Self-directed Solo 401k Plan
If you operate an owner-only business, a self-directed Solo 401k is an excellent option, to begin with. The only requisites for opening a Solo 401k plan include the presence of self-employment activity and the absence of full-time employees.
- Contribution limits: You can contribute up to $60,000 in 2017, inclusive of catch-up contributions worth $6,000.
- Investment options: Choosing a self-directed Solo 401k allows you to invest in different asset classes including real estate, mortgage notes, tax deeds/liens, precious metals, private equity, personal lending, and even stock/bond investments.
- Participant loan: Every eligible plan participant can borrow up to $50,000 or 50% of the plan balance, whichever is lower. These funds can be used for any purpose whatsoever including paying credit card debt, tuition payments and even going on a vacation.
- Roth savings: There are no income threshold limits for Roth Solo 401k retirement plans. You can contribute up to $24,000 annually irrespective of your income.
- Easy management: There are no filing requirements for self-directed Solo 401k plans having less than $250,000 in net assets, making it easier to manage.
Related article: How to choose a self-directed retirement plan for future
SEP IRA or Simple IRA
If you’re a small business with employees, start a SEP IRA plan or Simple IRA to contribute towards retirement.
With SEP IRA, you can contribute up to $54,000 in 2017. While a SEP IRA plan doesn’t offer catch-up contributions, Roth savings, or a participant loan, it still allows a sizeable contribution towards your retirement.
A Simple IRA is another retirement option, allowing you to contribute up to $15,500 in 2017, inclusive of catch-up contributions of up to $3,000. The plan allows tax-deferred savings and higher contributions as compared to a traditional IRA.
As a small business owner, you have an immense opportunity to enjoy financial freedom in your future; all you need is to get started and stay on course.
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Written by: Dmitriy Fomichenko