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Question for the Money Doctors

Question submitted on Jan 8, 2020.

Question

I own my own business. I don’t have a retirement set up. What is the best way as clearly I’m getting older.

Answer

There’s no time like the present to think about retirement.   You don’t indicate your current age nor how many years you might continue with your business before looking to retire.   There are a number of options to consider depending on if you have other employees, or are you self-employed with no other employees. 

You can set up a retirement plan through your business and potentially get a tax benefit for contributions made to the plan.  Some options to consider are as follows: 

  1. A Simple IRA.  The 2020 maximum contribution limit is $13,500.  If you are over age 50, a “catch up” contribution of an additional $3,000 is available for a maximum of $16,500 for the year.  The general rule with SIMPLE IRAs is the employer must match 3% of earnings, though there are exceptions to this and potential waiting periods for participation.
  2. A 401(k) plan for the company.  The 2020 maximum contribution limit is $19,500.  If you are over age 50, a “catch up” contribution of an additional $6,500 is available for a maximum of $26,000 for the year.  An employer match is not always required with a 401k, depending on how the Plan is established.  There are advantages to using an employer match depending on the company’s situation.  Participation can be limited or expanded depending on the size of the business and the Company’s objectives.  Also, a Roth 401(k) option could be considered depending on both yours and the Company’s objectives and needs.
  3. If you’re the sole employee of your business (or self-employed without employees), you could look at establishing a Solo 401(k).   This also provides for pre-tax or Roth 401(k) contributions.  If you have the ability to contribute beyond the $19,500 maximum for 2020 (and the additional $6,500 if over age 50), you could contribute up to another $37,000 pre-tax in 2020 for a total of $63,000 through a profit sharing mechanism. 

If you’re not interested in establishing a retirement plan through your business, you can always set up an Individual Retirement Account (IRA) or Roth IRA.  The 2020 contribution limits are $6,000 per person, or $7,000 if over age 50. 

The descriptions are very basic when considering your options.  The types of Plans you could consider have a number of variables that can be evaluated and customized to your needs.  You should discuss with your advisor, such as a CPA/PFS, the various options that are available and how they might apply to your overall situation in order to determine which would be the best/most effective retirement plan for your situation. To find a CPA/PFS visit findacpapfs.org to find a specialist near you.


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