 How Small Business Owners Should Plan for Retirement—By Kasey Yang Published: June, 2006 Many small business owners neglect to plan for their retirement. They may be too busy building their businesses to think 20 or 30 years down the road, or they may feel they need to put all their available cash back into their business. Whatever the reason, business owners who do not plan for retirement may come up short of retirement income. Not only do they often lack company retirement plans, but their personal investments may be inadequate. Equity in the business could replace investments, but there is no way to know how much the company will be worth when retirement comes. Some businesses do well while the owner is active but are worth little without the owner's energy and expertise. In addition to providing for their own retirement, many business owners are finding they must provide retirement plans programs for their employees, or otherwise they can't compete with large corporations for quality employees. Retirement Plan Options Several options are open to a small business owner who wants to start a company retirement program. There is no "right" one; each has advantages and disadvantages. Selecting the best-suited plan is a matter of considering funding costs, tax consequences, administrative requirements and, of course, the needs of the company and its employees. A "qualified" or "tax qualified" plan is one in which contribution are tax deductible and there is no tax on income earned by the plan's assets until the employee begins receiving payments. Defined Benefit Plan A qualified plan can be a "defined benefit" or a "defined contribution" plan. A defined benefit plan is one in which the amount the participant will receive upon retirement is set (defined) by a formula. The formula is usually derived from the retiree's length of service and average pay over the last several years of employment. A common form of defined benefit plan is the traditional company pension that pays retiree a guaranteed sum for life. Defined benefit plans can be expensive and administratively complex, so they are generally used in limited cases, such as when the owner is nearing retirement and needs to make large contributions. Defined Contribution Plan | ||
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