What’s Your Small Business Retirement Plan?

If you are working for yourself, you have been given the responsibility to save for your own future retirement. While you may not have access anymore to your employer’s retirement plans, there are several viable options to consider as savings vehicles for your own future retirement.

One of the biggest challenges that small business owners face is that they spend so much time working in their businesses; that they forget to take care of themselves financially. Saving for retirement is a daunting task for any individual, but as a small business owner, it is even more important to understand and take advantages of the investment opportunities available to you.

Each of the following plans offer the ability for small business owners to contribute towards their retirements as well as several offer considerable tax advantages for participating.

SEP IRA
You can contribute the lesser of $45,000 or 25% of your total compensation into a SEP IRA for the current year, all of the way up until you file your personal tax return for 2008. With a SEP IRA plan, you do not have to offer or contribute for any employees that you may currently have. The financial contributions to a SEP IRA will grow tax deferred.

Simple IRA
A Simple IRA is an investment vehicle that you will have to contribute money for any of your employees that meet minimum criteria within your company. You can personally contribute as the business owner up to $10,500 of your salary, all of which is 100% tax deductible for the year’s personal taxes. The other benefit is that the investment capital placed within the Simple IRA will grow on a tax deferred basis.

With regards to any employees that you have who are eligible, you will have to contribute either $1 for $1 up to 3% of their incomes for the money that they personally contribute into their Simple IRA’s, or a fixed 2% non-elective contribution into their accounts.

Roth IRA
A Roth IRA does not offer the benefit of an immediate tax deduction, but it does offer the option for tax free withdrawals on the principal and growth that are contributed after the age of 59 ½. Roth IRA’s also allow for tax deferred investment growth. The current maximum contribution into a Roth IRA for an individual is $5000 in 2008. There are income limits to a person’s ability to contribute to these plans so discuss these options with your financial advisor prior to making any contributions.

Profit Sharing/Deferred Compensation
Contributions into a profit sharing plan have to be made prior to the employer’s tax filing date; including extensions. An employer can contribute the lesser of $45,000 or 100% of the total compensation amount, but only 25% of the total compensation amount can be deducted on the tax return. Profit sharing plans allow for tax deferred investment growth.

Solo 401 (K)
The Solo 401(k) is a newer investment option for self employed individuals, allowing up to 100% of the first $15,500 of 2008 income and an additional 20% of the total self employment income to be contributed into the plan. The contributions are tax deductible and will grow on a tax deferred basis.

Why Should you Contribute?
Don’t rely on the sale of your business or on social security to provide for your retirement income stream. With so many unknown variables, it is suggested that small business owners prepare for their retirements through a carefully thought out financial plan. Each of the above retirment savings options offers benefits for both the business owner and the business when contributions are made.

No matter which plan you choose to leverage for your own personal retirement, it is important that you begin saving and that you continue to save for your future. Not only do these plans offer the benefit of tax deferral, allowing your money to grow quicker than a typical savings account, but most of them offer the added bonus of being able to take a much needed tax deduction for the year of each contribution.