Starting a business is a key component of the American dream. The entrepreneurial spirit is as old as the explorers that first graced our shores. It was the quest for something better, desire for exploration and discovery along with financial gain that led European explorers to raise funds, hire a crew and set sail for the New World. America was built on the innovations of inventors and entrepreneurs like Benjamin Franklin, Thomas Edison, Andrew Carnegie, Henry Ford and the Rockefellers. Regardless of when they were born, their family status, or their industry focus they all shared something in common – the entrepreneurial spirit. They lived the American dream by taking their concepts and ideas then turning them into a reality. The same spirit lives on today in the over 27.5 million businesses in the United States, many of which are owned by women.
According to experts there are approximately 8.1 million businesses owned by women in the United States. With more and more women choosing the path of business ownership one question on many women’s minds is, “How will I retire?”. Without employer paid retirement plans women are faced with the simple truth that if they want to retire on more than social security they will need to find other investment options. Here are some that are available to you:
- SEP – IRA : This is a fantastic option for solo-preneurs. A Simplified Employee Pension Plan is a way to set aside pretax savings. You can contribute up to 25 percent of your net self employment income up to $49,000 a year. For those wanting to lower their current tax burden while saving for retirement a SEP – IRA can be a good option. It is important to note that it cannot be a Roth IRA. The plan is flexible, allowing you to open it but leave it unfunded until it is time to file your return. That way you can make a strategic decision with your tax professional to determine how much of your income should be directed into the plan. If you had a lean year you can adjust the contribution down, keeping more money in your pocket today. As an added benefit you can contribute to a SEP – IRA while still employed and participating in a 401k plan. This works well for entrepreneurs building a business in their spare time. If you hire employees the plan could become more costly as you are required the contribute the same percentage for each qualified employee.
- Solo 401k : This is an ideal plan for employers wanting to contribute more money annually. You can contribute money as the employee, up to $16,500, and an additional 25% of your compensation (up to $49,000) as the employer. This brings your total available contribution up to $55,500. You can set up a 401k easily with little or no cost by going through companies such as Fidelity or Vanguard. The contribution amounts are flexible so you can control how much you set aside depending on your success that year. This plan also gives you borrowing flexibility. If you need access to your funds for other investments, company growth etc you can borrow up to half of the balance. This feature makes the 401k a retirement plan that also helps during a rainy day. This plan only works for you and your spouse. Employees are unable to participate so keep this in mind when considering your long term business plans.
- Simple IRA : This plan was designed for firms with less than 100 employees so if your business plan includes hiring a team but staying at a smaller scale this could be the one for you. This is a savings match plan so employees and the employer participate. Employees can contribute up to $11,500 pre tax or $14,000 if over 50. The contributions are tax deductible and grow tax deferred until drawn out of the account. Businesses are typically required to contribute 2 – 3% of the employee compensation regardless of their contribution level so if you are a struggling or new firm it may be best to wait before starting a Simple IRA program at the office. This plan does not work if you have a 401k plan through another employer. Also if you need to borrow against it within the first two years there is a 25% penalty. This plan is a good option for small businesses that have a track record and are excited about investing in their employees. If you are a solo-preneur or a start up this plan does not provide the flexibility or options you may need.
Consulting an investment professional is highly recommended. Your short and long term financial goals need to be carefully evaluated to determine which plan is the best for you. The most important thing to remember is that you have to start somewhere. Being self employed means that you have a lot on your plate with demands constantly coming at you. Retirement may be the last thing on your mind when taking a customer call, filling an order, updating the website or on a call with the company attorney. The challenge is that busy days are most days and if you do not prioritize your retirement years will pass before you begin, hurting your long term financial strategies. If you one day want to join the ranks of Florida retirees stop and take five minutes to make yourself an appointment with an investment professional. You will be happy you did.