Starting a business can be fraught with pitfalls but also laden with financial opportunities. Entrepreneurs exchange the financial security of salaried employment for the adventure of growing a business. During the early stages of starting a business, the focus is on simply making the business viable. Once that is secure, a business owner has a menu of flexible options to choose from for a successful financial future. Here are five financial planning options to consider if you’re an entrepreneur or self-employed.
Retirement Plan Flexibility
Retirement plan contributions serve the dual purpose of putting away money while reducing your taxable income. While salaried employees may be constrained by a maximum yearly contribution and company match, entrepreneurs control the framework of their retirement plan and can choose options that maximize savings. Newer entrepreneurs might look at a SIMPLE IRA. Maturing businesses might use a 401(k) with profit-sharing or a Solo 401(k). This can allow for significantly higher savings up to the current limit of $66,000 ($73,500 for those 50 and over). The Mount Everest option for business owners is to reach a point where a defined benefit plan makes sense. This can be used to create a lifetime income stream to supplement Social Security and retirement plan distributions.
Tax Efficiency
Choosing the proper corporate structure can also minimize tax liabilities and maximize net yearly income. This is a financial decision best made while consulting with a tax professional and a CFP® professional. Predictability of revenue, expense projections, salary numbers and retirement plan options are some of the factors that will help inform decisions around tax-efficient business structures.
Create a Salable Asset
Working as an employee can be rewarding, but that financial reward is limited. On the other hand, owning a business might translate to the biggest asset available to monetize at retirement. Your business exit strategy becomes extremely important in terms of how the sale will be structured. Will the owner continue to work for the company after the sale? For how long and for how much money? Determining these variables is necessary to incorporate the business sale into your financial plan.
Provide a Head Start for Children
Hiring and paying children to perform age-appropriate work creates several opportunities. The kids most likely will receive the income at a lower income tax rate and start meeting their Social Security requirements. It’s also a great time to take that earned income and fund a Roth IRA, taking advantage of lower income tax rates with many years for growth.
Retain the Option to “Retire Slowly”
Owning the business provides the opportunity to “retire slowly.” This might involve selling the business and staying on as a consultant or simply taking a backseat role as the next generation takes control. Remaining active into the traditional retirement years can provide both financial and lifestyle benefits, as opposed to disengaging completely.
The choice between working as a standard employee or going the entrepreneur route can be complex. For business owners, both new and old, a CFP® professional can help create a plan that will allow the owner to capitalize on available options. Find your CFP® professional today.
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