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Entrepreneurs: How to Talk to Advisors About Retirement Plans

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Entrepreneurs: How to Talk to Advisors About Retirement Plans

Being an entrepreneur can be as difficult as spelling entrepreneur. Apart from the financial risk involved, there are a lot of decisions to be made when starting your own business, including product offering, marketing strategy, entity type, compensation arrangements, and other factors. Plus, unless you plan to work forever, you’ll need to decide on a retirement plan. Choosing a retirement plan is one area that self-starting entrepreneurs might not want to go at alone; it will be complicated and can get more complicated if you have employees. To avoid costly mistakes and liability, we recommend working with a professional. Here, we will provide a foundation for the discussion that you should have with your advisor.

Popular small business retirement plans include SEP IRAs, SIMPLE IRAs, Solo 401(k)s, traditional 401(k)s, and defined benefit plans. The optimal plan will depend on a number of factors, including the amount and stability of extra cash flow that can be used to contribute to the plan and to maintain the plan (both now and in the future), your age, the age of your employees, employee turnover, and your general disposition toward generosity (certain plans require you to save on behalf of your employees, while others do not.) 

In 2017, the maximum contribution limit for SEP IRAs, Solo 401(k)s, and traditional 401(k)s is $54,000, which might be reduced based on income and includes contributions made by the employer and the employee, where applicable. Defined benefit plan contributions might be much higher. Unlike SEP IRAs and 401(k)s, defined benefit plans do not have a contribution limit. Instead, they have a maximum benefit amount. Contributions can be made up to an amount that is expected to provide the maximum allowable benefit of $215,000 in retirement (2017). Professional actuaries determine required annual funding amounts for defined benefit plans. (We told you it would be complicated.) 

Know that establishing certain retirement plans can be as simple as filling out an adoption agreement and completing an application through your brokerage firm. Although it’s easy, you might find that your brokerage company is not fully equipped to help with plan-related questions or requests that might arise down the road. Instead, we recommend hiring a third-party administrator (TPA) to help with choosing a plan, drafting the plan document, preparing necessary tax filings, and managing plan requests, such as loans, rollovers, and distributions. It will be money well spent. 

Making $ense of Tax-Deductible

A term used to describe the tax treatment of certain expenses or savings plan contributions.  Amounts spent on allowable expenses or contributed to certain retirement plans may reduce the amount of income subject to taxation. Common tax-deductible expenses include mortgage interest and property taxes paid. Popular tax-deductible retirement plan contributions include those made to 401(k) plans and traditional IRAs. 

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