Entrepreneurs owe themselves sold retirement plans

Entrepreneurs, whether they’re men or women, put a significant amount of money into the business to help it grow, and when it’s time to retire, they may be able to sell the company and get their investment back, along with any appreciation in value.

But while it may seem like business owners have it made, they shouldn’t be fooled into thinking they can rely solely on the company as a retirement nest egg. Entrepreneurs need to consider building wealth outside the business.

There are certainly rewards that come with owning a business, but entrepreneurship also comes with plenty of risks. Sometimes, circumstances beyond the owner’s control can have detrimental effects on the company’s value.

Additionally, the business could change dramatically between now and when an owner decides to retire.

As a result, it’s important to have a backup plan in place, just in case things don’t work out as expected.

One of the first places business owners should start is a good retirement plan. If one is not already in place, entrepreneurs should consider contributing to a traditional or Roth individual retirement account to enjoy the benefits of a tax-deferred or tax-free growth of retirement savings.

If the business doesn’t have a qualified retirement plan – and as long as a spouse isn’t covered by a plan through another employer – entrepreneurs can take a deduction on income taxes of up to $4,000, or $5,000 if they’re older than 60. If the business has a retirement plan, contributions may not be deductible, depending on income, and Roth IRA contributions are never deductible.

Boosting savings

While those steps are a good start to retirement savings, a qualified plan for your business will let you save much more.

There is a wide variety of available plan options, and some can be established with minimal expense.

Just to provide an idea, plan types include owner-only 401(k) plans, 403(b) plans for tax-exempt 501(c)3 organizations and defined-benefit, or traditional pension, plans.

The best plan for a business depends on several factors, including the owner’s objectives.

One thing to keep in mind is that even if you contribute the maximum to an IRA or retirement plan each year, it may not be enough on its own to provide a financially secure retirement. To help you prepare adequately, other savings also should be in place.

Once retirement savings options have been sized up, you may choose to invest in an IRA, a qualified plan, a taxable account or a combination of those.

Be aware that the returns on marketable investments may be less than what you’re used to earning in your business, but that actually may work to your advantage.

These investments may come with less risk and greater liquidity. They also provide diversification, which is key to any successful investing strategy.

A business is definitely one of the most important assets owners will have, but it doesn’t have to be the only one.

Plan ahead and invest in your retirement as a whole, using a combination of other assets to complement a business investment.

Timothy M. Reese is senior vice president-investments with A.G. Edwards & Sons Inc. in Springfield. He may be reached at timothy.reese@agedwards.com.