The Best Retirement Plans for Entrepreneurs

Retirement is what every individual worker must witness in their lifetime. But when we speak about entrepreneurs, we must explain it from other aspects. Entrepreneurial financial attainment capacity was positively determined by an entrepreneur’s investment in a financial asset, employment income, business net worth, and business income, and was negatively determined by personal annual and business expenses. On the one hand, the research findings indicated that expected earnings positively defined targeted retirement income after retirement but negatively elucidated by expected spending after retirement.

It is challenging for a young person to plan for retirement. This is the case since many would rather spend their money now. People think: “Why save money now that I may not spend for 30, 40, even 50 years? I can always save for retirement later.” Many important concepts associated with retirement planning are discussed. Retirement planning is one of the most important but more difficult tasks an individual or family can perform.

Based on statistics from recent surveys, the vast majority of Canadians wish to retire before the age of 65. But only a tiny minority have developed a detailed plan that will allow them to realize their retirement dreams. For example, in recent surveys of Canadians, over 85% of respondents feel that saving for retirement is an important goal. But, almost half of the respondents have never contributed to a Registered Retirement Savings Plan (RRSP), and two-thirds do not have a formal, written retirement plan.

Planning would allow for a much easier life in retirement. Mentally, though, it can be not easy to do, especially for those in their 20s or 30s. If experience teaches us anything, time is an important ally when saving money. The earlier a retirement plan is developed and implemented, the easier it is to meet the plan’s goals. For example, a 25-year-old wanting $1 million at the age of 65 only has to save $1,300 per year or $85 per month, assuming a 12% average return on the investment in financial assets. On the other hand, a 45-year-old must save $13,900 per year or $1,000 per month to achieve the same goal. Time, really, is on your side when you are young.

You have an essential role as an employer in helping America’s workers save. Starting a retirement savings plan will help your employees save for their future. Retirement plans may also help you attract and retain qualified employees and offer your business tax savings.

A retirement plan has significant tax advantages:

  • Employer contributions are deductible from the employer’s income
  • Employee contributions (other than Roth contributions) are not taxed until distributed to the employee
  • Money in the plan grows tax-free
  • Distributions may be eligible for tax-favored rollovers or transfers into other retirement programs.

Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans, or defined benefit plans.

 

IRAs

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Gustavo Frazao/Shutterstock

People tend to think of an IRA as something individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds. Employer contributions must be sufficient to fund promised benefits. Small businesses may choose to offer IRAs, defined contribution plans, or defined benefit plans. Many financial institutions and retirement plan practitioners make available one or more of these retirement plans that have been pre-approved by the IRS.

Key Advantage: Easy to set up and maintain.

Employer Eligibility: Any employer with one or more employees.

Employer’s Role: Arranged for employees to make payroll deduction contributions. Transmit contributions for employees to IRA. No annual filing requirement for the employer.

IRA-Based Plans:

  • Payroll Deduction IRA
  • Simplified Employee Pensions (SEPs)
  • SIMPLE IRA Plans

Defined Contribution

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ChristianChan/Shutterstock

Defined contribution plans are employer-established plans that do not promise a specific benefit at retirement. Instead, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions. On the other hand, defined benefit plans promise a specified benefit at retirement, for example, $1,000 a month. The benefit amount is often based on a set percentage of pay multiplied by the years the employee worked for the employer offering the plan.

Types of defined contribution plans:

  • Profit-Sharing
  • Safe Harbor 401(k)
  • Automatic Enrollment 401(k)
  • Traditional 401(k)

We will explore all the plans briefly in our future articles, but for now, you have a general idea of the plan types.

 

Photo: fizkes/Shutterstock

 


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