At Make Taxes Fair, we believe knowledge is power—especially when it comes to planning for the future.
One essential aspect every business owner should prioritize is retirement planning.
We actually prefer to call this “future planning” as you are really making the decision today to allocate resources (time and money) to planning and securing a confident financial future.
Whether you’re exploring 401(k)s, IRAs, or other retirement options, building a robust financial foundation for your future is critical.
This guide will break down the importance of retirement plans, explore different types of plans, and highlight scenarios where they can play a key role in securing your financial future.
Retirement plans are structured financial tools designed to help individuals save and invest for their future. These plans often provide significant tax advantages, making them an essential component of long-term financial planning for business owners.
Plan Types: Common retirement plans include:
Solo 401(k)s
SEP IRAs
Defined Benefit Plans
SIMPLE IRAs
Profit-Sharing Plans
Tax Benefits: Many retirement plans offer tax-deferred growth or allow for pre-tax contributions, reducing your taxable income today.
Contribution Limits: Each plan type has specific contribution limits, which influence how much you can save each year.
Before diving into specific retirement plans, it’s crucial for business owners to achieve goal clarity. Without a clear vision of your desired future state, it becomes challenging to make informed decisions about savings, investments, and adjustments along the way.
Define Your Retirement Vision: Do you envision retiring early, maintaining a certain lifestyle, or leaving a financial legacy for your family? Having a concrete goal helps guide your financial strategy.
Align Financial Decisions with Long-Term Objectives: Clarity ensures that every financial choice you make—whether it’s contributing to a specific retirement plan or investing in business growth—supports your broader vision.
Adapt to Changing Circumstances: With a clear goal, you can adjust your plans as life or business conditions evolve, ensuring you stay on track.
Assess Your Current Position: Understand your business’s financial health and your personal net worth.
Visualize Your Future: Consider where you want to be in 10, 20, or 30 years, both professionally and personally.
Set Specific, Measurable Goals: Break your vision into actionable steps with clear milestones.
Consult a Professional: A tax strategist or financial advisor can provide insights to help solidify your retirement goals and align them with your financial plan.
A common mistake many business owners make is assuming that their business alone will serve as their retirement plan. While a successful business can be a valuable asset, relying solely on it for your retirement is risky. Here’s why:
Unforeseen Health Issues: Life is unpredictable, and health problems may arise, forcing you to step away from your business sooner than expected. Without a separate retirement plan, this can leave you financially vulnerable.
Market and Industry Risks: Business valuations can fluctuate due to economic downturns, industry changes, or unexpected competition. Relying solely on your business’s value could jeopardize your financial security if the market shifts unfavorably.
Illiquidity of Business Assets: Unlike a retirement plan, your business may not be easily converted into cash when you need it most. Selling a business can take time, and market conditions may not always align with your timeline.
Dependency on Key Individuals: If the business relies too heavily on you or other key personnel, its value may diminish when it comes time to sell or transition. A business that isn’t transferable is not a reliable retirement strategy.
Diversify Your Retirement Savings: Build a robust retirement plan alongside your business to ensure financial security, regardless of unforeseen events.
Develop a Succession Plan: A transferable business is more valuable and marketable. Start planning early to ensure a smooth and profitable transition.
Allocate Resources Wisely: Invest in both your business and external retirement vehicles to reduce risk and build a diversified portfolio.
The effectiveness of your retirement plan depends on both your immediate financial needs and long-term goals.
Definition: Saving for near-future milestones, like business expansion or employee benefits.
Focus: Ensuring cash flow while contributing consistently to a retirement plan.
Definition: Establishing financial security for post-retirement years.
Focus: Maximizing compounding growth and securing a stable income stream for retirement.
Balancing short-term and long-term goals ensures financial stability throughout your career and retirement. A well-structured plan can help you manage both efficiently.
Solo Business Owners
A Solo 401(k) allows business owners without employees to save aggressively, with contributions from both employer and employee roles.
Growing Small Businesses
Offering SEP IRAs or SIMPLE IRAs can help retain and reward employees while providing tax benefits to the business.
High-Income Earners
Defined Benefit Plans enable significant tax deferrals, ideal for business owners with substantial income looking to save heavily for retirement.
Fluctuating Business Profits
Profit-Sharing Plans offer flexibility, allowing higher contributions during profitable years and lower contributions during leaner times.
Business Succession Planning
Retirement plans like 401(k)s and SEP IRAs can be integral to a smooth transition, ensuring financial security during the sale or transfer of the business.
Example: Sarah, owner of a boutique marketing agency
Plan Chosen: Traditional 401(k)
What She Did: Sarah is 45 years old and decides to contribute the maximum limit to her Traditional 401(k). In 2024, this could be up to $23,000 (if under 50) or even more if she includes her employer (her business) contributions.
IMPACT – Tax Savings Now: By deferring a large portion of her salary into the 401(k), Sarah immediately reduces her taxable income for the current year. If Sarah contributes $23,000, she effectively lowers her overall taxable wage base by that amount, which can result in thousands of dollars in tax savings depending on her marginal tax rate.
Takeaway: Maxing out contributions is one of the most straightforward ways to lock in significant tax deductions, thereby increasing your cash flow for other business needs while still steadily building your retirement nest egg.
Plan Chosen: SIMPLE IRA
What He Did: Carlos wants to keep his loyal baristas and managers on board, so he offers a SIMPLE IRA. He matches each employee’s contributions up to 3% of their salary. Carlos also contributes to his own SIMPLE IRA, taking advantage of the employer match.
IMPACT – Tax Savings Now: Every dollar Carlos contributes on behalf of his employees reduces his business’s taxable income. Plus, the business portion of those contributions is tax-deductible to the company. On top of that, Carlos’s own contributions to the plan further reduce his personal taxable income, providing a dual benefit.
Example: Carlos, owner of a small coffee shop
Takeaway: Matching contributions not only boost employee morale and retention but also create significant current-year tax deductions for your business. A “win-win” scenario where you support your team and reduce your taxable income.
Example: Michael, a retiring consultant
Plan Chosen: Defined Benefit Plan transitioning to IRA
What He Did: Michael spent 20 years building a successful consulting firm. He set up a Defined Benefit Plan during his high-income years to make large, tax-deductible contributions. Upon retirement, he rolled those assets into a Traditional IRA. Now, he carefully plans distributions to keep his taxable income within a lower bracket.
IMPACT – Tax Savings Now: While the big payoff for tax-efficient withdrawals typically comes during retirement, Michael has already enjoyed significant tax deductions over the years by funding his Defined Benefit Plan at higher limits than a 401(k) would allow. This drastically lowered his annual taxable income. As he transitions to retirement, he’s managing withdrawals to keep his current tax bill as low as possible, ensuring he doesn’t bump into higher brackets.
Takeaway: Large contributions to a defined benefit plan can offer more substantial tax savings during high-earning years. Later, a deliberate withdrawal strategy ensures you don’t erode those hard-earned savings through excessive taxes in retirement.
Example: Lori, a 53-year-old IT consulting firm owner
Plan Chosen: Solo 401(k)
What She Did: Since Lori is over 50, she qualifies for catch-up contributions. She maxes out the standard employee deferral, then adds the catch-up contribution amount (for example, an extra $7,500 for those over 50 in 2024), and also contributes the employer portion as the business owner.
IMPACT – Tax Savings Now: The additional catch-up contribution beyond the standard limit lowers Lori’s taxable income even further. Because she’s contributing on both the employee and employer side, she’s maximizing her plan. The result is a considerable immediate tax deduction, which puts more money back into her business for growth opportunities or simply helps her keep more of her profits in her pocket.
Takeaway: After age 50, catch-up contributions can significantly boost your retirement account balance. They also provide an immediate tax break, especially if you’re a business owner who can combine employee plus employer contributions in a Solo 401(k).
Example: Thomas, a gym franchise owner experiencing a “low-income” year
Plan Chosen: Traditional 401(k) with a Roth Conversion strategy
What He Did: Thomas had an off-year due to gym renovations, leading to lower-than-usual profits. He chooses this time to convert a portion of his Traditional 401(k) funds into a Roth IRA.
IMPACT – Tax Savings Now: While a Roth conversion triggers taxes on converted funds in the current year, choosing a year with exceptionally low income often means being taxed at a lower bracket on that conversion. Thomas essentially “locks in” future tax-free growth. Although this doesn’t create a deduction now, he minimizes the total tax he’ll pay over time. In many cases, strategic timing of the conversion can still provide a tax benefit by preventing a higher tax rate on those funds in future years.
Takeaway: Roth conversions don’t offer immediate deductions, but by carefully timing them in a low-income year, you reduce the total tax hit. You also ensure that withdrawals down the road are tax-free, potentially saving a significant amount in retirement.
Retirement planning is essential for business owners seeking to secure their future and maximize tax advantages. Whether you’re:
Maximizing contributions to receive the highest immediate deductions,
Offering employer matches to reduce your business tax bill while retaining top talent,
Structuring your withdrawals to stay in favorable tax brackets,
Taking advantage of catch-up contributions to supercharge your retirement savings after 50, or
Executing timely Roth conversions to reduce future tax liabilities,
…each strategy can have a profound impact on both your current and long-term financial well-being.
Ready to take control of your future? Visit our resource center for more tips, tools, and strategies designed to help business owners like you build lasting wealth and ensure a secure retirement. By understanding the various plan options and implementing smart strategies now, you’ll create a financial legacy that supports your personal and professional goals.
Final Note: Always consult a qualified tax professional or financial advisor to choose the best retirement plan for your unique situation. While these examples showcase common scenarios, your specific strategy should be tailored to your income level, company size, and overall financial objectives.