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Retirement Options for Entrepreneurs

by Olufisayo

Entrepreneurs have it rough. They have the best opportunities to reach success, but they also have to think of their own future and safety net without anyone else’s help.

For those who are successful and see a business come to fruition, grow, and become established, the success can happen with the financial fruits of their labor. However, for those who struggle to see their dreams come to life and instead work for years to keep a business alive, there is no pension or reward program waiting at the end.

Instead, the financial means by which these business owners and generators can retire depends on how well they saved in the meantime.

The Basic IRA Method

If nothing else, every entrepreneur with a spare dollar should be putting that money into an individual retirement account, or IRA. There are two available, the Traditional IRA and the Roth IRA. Depending how the entrepreneur receives funds, both can be used as legal tax shelters each year for at least a portion of funds.

The Traditional IRA provides a tax-deferred vehicle for saving. Pre-tax money put into the account avoids payroll or income taxes until the money is actually taken out much later in life. In theory, a person should be at a lower tax bracket by then, reducing the taxes actually charged on the funds withdrawn. This vehicle doesn’t work well, however, if the person thinks he will be making more money in his supposed retirement years than now. Additionally, depositors have to start taking their money out at age 70.

Traditional IRA deposits are capped as of 2012 at $5,000 a year with a catch-up provision after age 50 allowing $6,000 a year. A matching spousal IRA can double the amount for a married couple with an entrepreneur. This and other helpful couples counseling tips are discussed more on other pages in this website.

The Roth IRA also works as an independent IRA, but after-tax money is deposited instead. This can be any funds that have already been taxed by payroll or income taxes. The funds once deposited are allowed to grow via investment without any further taxes. So a balance that sits for 20 or so years can earn interested and market gains without any taxes on the profit. Further, the Roth IRA doesn’t have forced withdrawals at age 70 ½ like the Traditional IRA does. So an Entrepreneur can will the whole pot without taxes to an heir. The heir, of course will pay inheritance taxes, however.

Roth IRA annual deposits are also capped at $5,000 per year with a similar catch-up provision after age 50. Spousal Roth accounts for married couples can also double entrepreneur savings per year.

Business Retirement Approaches

Within a business itself, an entrepreneur can also take advantage of business-initiated retirement accounts. Some of the easiest involve the Simple IRA and the SEP IRA, which are both far faster to set up than a conventional 401(k) plan.

The Simple IRA offers a small business or micro-business the ability to establish a traditional IRA within the company (http://www.irs.gov/retirement/sponsor/article/0,,id=139831,00.html). Entrepreneur companies have to be less than 100 employees with no other kind of plan in place. The company provides each employee a 2 or 3 percent contribution and the employee can deposit whatever he wants. The best part is, the entrepreneur counts as an employee as well and can participate, adding an extra account option for tax-deferred savings. This would be in addition to any personal Traditional IRA outside the business.

A SEP IRA works in a similar fashion for a business, allowing the company to deposit into traditional IRAs set up for employees (http://www.irs.gov/retirement/sponsor/article/0,,id=139828,00.html). The business can be any size. Under this vehicle, only the company can make deposits, but if the entrepreneur is part of management, then in theory he could control how much is deposited in his own account under the plan, as long as the same benefit is given to other employees in the same firm. Deposits can be up to 25 percent of an employee’s pay per year.

Non-Conventional Means

Obviously, an entrepreneur can also invest in normal market instruments such as stocks, bonds and mutual funds through a normal brokerage account. Such savings are taxable for capital gains earned, however, That said, when the above tax shelters are maxed out, market investments still earn better generally that just sticking funds into a savings account or certificate of deposit.

Alternatively, many entrepreneurs place their funds for long-term gain into unconventional assets such as real estate property, new businesses or partnerships, development projects, art, collections, and other physical holdings that generally gain value over time. These instruments can provide significant gain by the time a retirement comes around, and they can include large sums of funds at one time. However, the risks of loss are far higher and they have no deposit protection like those on a bank account. So it’s very much investor beware.


A variety of tools exist for an entrepreneur to save for retirement with, but at the end of the day what matters is planning and starting early. Unless the investor plans to be running business into old age, putting money aside now will help avoid worries in the future when it’s time to take a break.

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1 comment

How to Start Retirement Planning For Entrepreneurs March 28, 2019 - 10:15 AM

[…] financial advisor can also assist you in choosing an entrepreneur retirement option. While traditional employees save for retirement in conventional 401(k) plans, entrepreneurs have […]

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