Entrepreneurs and small business owners always seem to have 10 things to do before the day is through. You never know what might come up, and sometimes not every planned task gets done on time. In the midst of this fast-paced lifestyle, retirement might not be the first thing on your mind. It's easy to put non-urgent, long-term tasks on the back burner.
However, let retirement planning get away from you for too long, and no matter how well your business is doing now, you might find your financial future compromised. An Individual Retirement Account (IRA) is perhaps the most well known way to save for your golden years at this point. Once you start one and let it grow, you'll see it's well worth the effort. Here are a few pointers to get you started:
1. Want to pay fewer taxes? Open a traditional IRA.
Depending upon your filing status and Modified Adjusted Gross Income (MAGI), some or all of your retirement contribution may be tax-deductible when you fund a traditional IRA. Your contributions are made with pre-tax dollars, but your investments grow in a tax-deferred account. When you start to take money out for retirement, the amount you withdraw is taxed as ordinary income. Most retirees are in a lower tax bracket, so that means you will be taxed less over the long run, and money you save on paying taxes now can go straight back into your business.
2. Want to pay no taxes when you retire? Open a Roth IRA.
If you want to pay now and relax later, open a Roth IRA and fund it with post-tax dollars. Be aware that there are limits on income eligibility, and allowable contributions are based on your filing status. The benefit to a Roth IRA is that when it comes time to retire, qualified withdrawals are not subject to any federal income tax. Therefore, if you expect to be in a higher tax bracket later on (say you make it really big or you have fewer deductions), you can enjoy your savings without worrying about taxation.
3. Start early and retire a millionaire.
It's conventional wisdom for employees to max out their 401(k) contributions when a company will match their investment. Though small business owners don't have the advantage of a matched contribution, the wisdom still translates. Invest the maximum amount allowable into your IRA each year and let the power of compounding do the work.
The sooner you can start making contributions, the better. If you aren't convinced that retirement planning at this stage in your business is important, take a look at the figures below to see how your balance will grow over a 10, 20, 30, and 40 year period of time. While your average annual return may be different, assume for this example that you invest the maximum allowable contribution of $5,500 each year and earn a conservative annual rate of return of 8 percent.
- After 10 years, you will have $86,050.19
- After 20 years, you will have $271,826.11
- After 30 years, you will have $672,902.37
- After 40 years, you will have $1,538,795.91
You can use an IRA calculator to see how changing the variables (years and interest rate) will change the amount of money you can accumulate.
4. Can't make a contribution this year? Don't worry.
Under IRS rules, you have up until tax day to contribute to your IRA for the current calendar year. For example, if you decide to fund an IRA for tax year 2014, you can make contributions anytime from January 1, 2014 to April 15, 2015. Waiting until the last day to contribute is better than not contributing at all, but generally it is a wiser financial strategy to make smaller, regular payments throughout the year (dollar-cost averaging).
5. Try using an SEP-IRA for your employees. It's like a retirement plan.
You can attract and keep great employees by offering them competitive salaries and great benefits. A Simplified Employee Pension (SEP) plan has lower start-up and operating costs compared to many other types of retirement plans. An SEP is a retirement plan designed for small business owners; it covers you, as well as your employees. You can contribute up to 25 percent of each employee's pay. The contributions you make are tax deductible. And your business is not taxed on any earnings from the plan's investments. You have flexibility with SEP plans because you decide on the contribution amount each year, and if money is tight you do not have to make any contribution at all.
6. Explore more investment options with a self-directed IRA.
Entrepreneurs who prefer having more control over their finances may prefer a self-directed IRA. You have a wider array of investment choices with this one than you do with a regular, broker-driven IRA. You can decide to invest in real estate, precious metals, private company stock or a number of other alternative investments. Experts recommend that you diversify to lower risk items; one way to do this is to put 10-15 percent of your holdings in precious metals. You can even roll over funds from another IRA into a self-directed IRA--up to once per year. However, the IRS has some restrictions regarding what is allowed in a precious metals IRA; you can find a list of eligible coins on sbcgold.com.
7. Can't touch this! Your IRA is protected in bankruptcy court.
Your retirement savings inside a traditional or Roth IRA are safe from creditors. Currently, $1,245,475 of an individual's assets held inside an IRA are exempt from confiscation by the bankruptcy courts to satisfy claims by creditors. An IRA is a smart and safe way to hold onto the money you make--just in case.
The bottom line? Don't neglect your future.
We all want to live a comfortable lifestyle when we retire, so it's best to start planning early. Today, you might already be running a business or starting a new venture, which certainly requires a lot of time and energy, but it's prudent to think big picture. Until you're raking in more surplus cash than you can handle, you should live below your means and put aside funds for tomorrow. Don't let being "too busy" or "not ready" distract you from smart, long-term retirement planning. It's not as if you really have to lift a finger, especially because contributions can all be handled automatically. Your future self will thank you.