As the April 18 tax deadline looms, you're likely overwhelmed with short-term concerns about your business budget and your personal finances. But you should also be considering two crucial longer-term questions: What are you saving for retirement, and where are you saving it?
If your answers boil down to "hoping to sell my business when I'm ready to retire," please think again. This is a particularly good time to weigh your options: You still have a few weeks left to put aside some money for the 2015 tax year--and then you'll have a jump on this year's financial decisions.
Some of these decisions have gotten much easier to make. The Obama administration last year finalized the myRA, a retirement-for-beginners account. But in case you want something more tailored to your individual needs, we've compiled a guide to some of the best retirement accounts for entrepreneurs.
"You need to ask, 'What size fits me best?'" says Mary Gibbons Gardiner, a vice president and financial adviser with Morgan Stanley.
The most common options for business owners are individual retirement accounts (IRAs), solo 401(k)s, and simplified employee pensions (SEPs). Which makes the most sense for you hinges on how much you're allowed to put away each year; whether you have employees; how high your tax rate is; whether you might need to lay hands on your contributions before you retire; and how old you are. Many allow you to exceed the following limits if you're at least 50.
If you want to do something right away that counts toward 2015, you have until April 15 to open an IRA or SEP. If you don't mind being limited to $5,500 a year, opening an IRA is an easy, quick choice. You can do so online for free with almost any bank or brokerage firm, even if you don't already have an account there. (Some require a minimum initial deposit, but many don't.) You can pick individual investments or use the automated portfolio management feature (a.k.a. robo-advice) at some financial institutions.
If you want to deduct your IRA contributions from your taxes, pick a regular IRA; you'll pay taxes on your funds once you withdraw them. A Roth IRA is the opposite: Your contributions are from after-tax dollars, but withdrawals are not taxed. This is the best option if you're young or don't make much money, because you're in a lower tax bracket and don't need the deductions you get with regular IRAs, says Mari Adam, a certified financial planner and president of Adam Financial Associates in Boca Raton, Florida. A Roth IRA also allows you to withdraw your contributions at any time, without penalty. (There's usually a 10 percent penalty, plus taxes, for withdrawing your regular IRA contributions before you're 591/2.)
If you have more money available to put away, consider an SEP. It's popular among business owners with no employees, and the self-employed who want to save more. You may contribute as much as 25 percent of your net earnings, up to $53,000. Another option if you're self-employed or if your spouse is your only employee is a solo 401(k), which allows you to stash the same percentage of earnings and to defer up to $18,000 of your salary annually. If you don't have employees, you might prefer an SEP, which gives you until April 15 to make contributions for the previous year, and has a percentage contribution formula, which benefits those with higher incomes. An SEP, like a 401(k) and an IRA, can also help lower your tax burden in areas with high rates, like New York and California.
Finally, if you want an account that covers your employees, too, consider a savings incentive match plan for employees ("simple") IRA. For small businesses with up to 100 workers, a simple IRA is usually free and easier to administer than a traditional 401(k). You and employees can each put away $12,500 of your salaries; you usually have to match up to 3 percent of your employees' compensation.
Ultimately, relying on building your business might pay off--but it might not. Whatever happens, you'll need to retire at some point. Avoid the risk now by making a smart retirement backup plan.