When you first start your business you have a lot to do from generating revenue to marketing to hiring workers. You may not make enough in the very beginning to pay yourself, much less save for retirement. Once your business is established it’s time to think bigger picture and part of that includes retirement planning.
Once you have reviewed the options below, consider contacting a financial planner who can assess your overall financial picture and create a plan that aligns with your goals. For more information on non-retirement employee benefits, see Employee Benefits: Rules and Options.
Retirement plans change when your money is taxed. There are two types, pre-tax and post-tax. Having some retirement money saved that is pre-tax and some that is post-tax can give you more options in retirement, because you can decide which account to pull money from, and better manage your retirement taxable income and therefore your tax rate.
Pre-tax contributions
Pre-tax retirement plans allow you to avoid paying tax on the money you contribute this tax year, but you will pay tax later when the money is withdrawn in retirement. If it is taken out before retirement age, you may have to pay the tax plus penalties for early withdrawal.
Taxpayers choose pre-tax retirement plans when they expect their tax rate is higher now, in their working years, than it will be in the future when they retire and living on a limited income.
For example, say that today you are paying taxes on your income at a rate of 28%, but in retirement you expect your tax rate could be as low as 12% because you will be able to live off less income than you are today. You decide you can contribute $12,000 per year to a retirement plan and you make steady pre-tax contributions every year for 25 years. You may end up with between $650,000-$700,000 in that account at the end of 25 years. You can then decide to withdrawal a little at a time to keep your tax rate low.
Types of pre-tax plans include:
- Traditional IRA for individuals
- 401(k) for for-profit business entities
- 403(b) for certain tax exempt organizations
- SEP IRA for small business owners
- SIMPLE IRA for small business owners
Post-tax contributions
Some retirement contributions are made with income that has already been taxed. These plans allow the funds to grow tax-free and not be taxed when the funds are withdrawn in