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Retirement account options for small business owners

May 27, 2018

Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to yourmoney@enquirer.com 

Cindy from Highland Heights: I’m going to be starting my own business soon, and hopefully hiring a few employees. What’s the best kind of retirement account to open? 

Answer: Congratulations on your new business! It’s great you’re researching retirement accounts to help plan not only for your future, but your employees’ as well. 

You have a few options being a small business owner. One possibility is to open a SEP (Simplified Employee Pension) IRA. Both self-employed individuals and small business owners can use this type of account. This is an employer-only contribution account, meaning it’s tax deductible and recorded as a business expense. Employers can contribute up to 25 percent of employee compensation up to $55,000 in 2018, and every employee receives the same percentage of contribution (employees cannot contribute on their own). Keep in mind, as an employer, you have to contribute the same percentage to employee accounts when you contribute to your own accounts. 

Another option would be to establish a SIMPLE (Savings Incentive Match Plan for Employees) IRA. Employees can make pre-tax contributions and employers can contribute with tax-deductible contributions. An employer can set this up in two different ways: Your business can match 100 percent of employee contributions up to the first three percent (the match can be lowered to one percent for two out of five years of the plan), and if an employee doesn’t contribute on his or her own, you don’t have to contribute on their behalf. Or, your business can make a two percent non-elective contribution for eligible employees. This means, even if an employee doesn’t contribute on his or her own, your business still must contribute. 

Before moving forward with any type of account, make sure you understand all the associated set-up and administrative fees. 

The Simply Money Point is that there are a couple of options for you to explore for your new business. Work with a financial planner (we recommend a Certified Financial Planner™ or a Charted Financial Consultant®) and a tax professional to evaluate each account and determine which one would be the best option for you and your employees.  

 

Bob from Lawrenceburg: I’m worried about my 401(k) losing too much money before I retire next year (I’m 64). What can I be doing to protect my money? 

Answer: When you initially set up your 401(k), you selected a mix of stocks and bonds that hopefully matched your risk tolerance and associated financial goals. This may be a good time to evaluate both your risk tolerance and your investment mix again. 

When you’re younger, it’s usually okay to expose your investment mix to more risk because there’s more time to recoup any losses. However, as you get older, your room for error shrinks. You may want to reduce your risk and select a different investment mix so there isn’t as much turbulence in your account when the market goes up and down. 

Essentially, your investment mix is a strategy composed of a few components: time horizon, risk, and reward. This is based on a lot of factors, including your financial goals. The longer your time horizon, potentially the more risk you may be willing to take. Each stage of your life may require a different investment mix. 

And don’t forget, you shouldn’t be looking at your 401(k) in a vacuum. You should also take a look at your other investments and accounts outside your 401(k) and see if you need to make adjustments to them as well. Your 401(k) is just one piece of your financial puzzle. 

The Simply Money Point is that the best way to better cushion your 401(k) account heading into retirement is by selecting the right investment mix to match your financial goals and tolerance for risk.

 

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.

Retirement