Small Business Owners Need Retirement Plans

Do you own a small business? If so, then you already know, all too well, how challenging it can be to run your business and look out for yourself too. One important way that you should be “looking out” for yourself, if you’re not doing so already, is by taking some of your money and putting it into a retirement plan.If you’re not doing that, then you’re missing out in some major ways.  

Missed Tax Benefits

One of the big ways in which you miss out if you don’t have a retirement plan is by not getting the resultant tax benefits. Most plans open to business-owners, such as 401(k) plans designed specifically for them, come with a great many tax benefits…benefits you don’t get if you don’t sign up for a retirement plan. Such benefits include, in many cases, tax-deductible contributions to your retirement plan, which is basically like free money, and who would turn that down?

Missed Savings and Emergency Cash

Another problem with not having some kind of retirement plan in place is that this can make it much harder to save money for the future. And, when you don’t have money saved and retirement rolls around, what are you going to do? You don’t want to be one of those people scrambling to make ends meet in retirement and never truly enjoying what should be this golden time in your life.

Furthermore, many retirement accounts, including 401(k) plans, give you the option to borrow from your account if you need to, such as in an emergency situation. It’s nice to have that built-in safety net, a safety net you don’t have without a retirement plan, in case you or your business fall on hard times.

As you can see, you miss out on all kinds of things- and these are just a few- when you don’t save for the future. So, make sure you have a retirement plan and that you make full use of it to get and enjoy these awesome benefits.

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Tips for Making the Most of Your 401K

In recent years, thanks in large part to pensions becoming less widely available, 401(k) plans have become the option of choice for those planning for their retirement. These plans, while beneficial, can sometimes cause confusion. Most people don’t know how much to put into these accounts or whether they should even have one, but with a little advice from us and your financial advisor, you can make smart decisions about how much to contribute.   

Busting the Match Myth

Most employers are willing to match 401(k) contributions but only up to a certain amount, usually around 6%. Thus, many people who have these plans only contribute up to that 6% mark and then stop.

It’s important to know, however, that it’s usually best to contribute more than that. In most cases, the IRS allows up to $18,000 in elective 401(k) deferrals. Those who are 50 or older can even contribute more if they wish, currently a whopping $6000 more!

Know Your Contribution Limit

While you do want to contribute more than 6% if you can, it’s important that you do know the limits the IRS has put in place for contributions. Do bear in mind, however, that though these limits apply to most people in the respective categories, it’s always best to check with your investment advisor as there may be special considerations in your case:

Elective Deferrals Limit: $18,000

Total Contribution Limit for 50+: $59,000

Total Contribution Limit with employer contributions: $53,000

As mentioned, an investment advisor really is your best bet for making the most of these tips and for making the most of your 401(k) in general.

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Withdrawing from Your 401k - What You Need to Know

A lot of people are confused about how, exactly, they can use or withdraw funds from their 401(k) plans. There’s a good reason for their confusion too since plans usually vary in the details. Some employer-offered plans, for example, allow regular withdrawals from 401(k) accounts after retirement. Other plans do not allow regular withdrawals at all, but, even among those that do, there are still variations. For example, some plans allow monthly or quarterly pre-scheduled withdrawals while others allow withdrawals whenever the account holder wants to make them.  

The types of plans mentioned above are obviously of the more flexible variety; unfortunately, though, the vast majority of plans aren’t that flexible. There are plans out there that don’t allow you to make withdrawals on a regular basis and only give you the option to leave your money where it is or take it out in one lump sum.

If you have one of the more flexible plans, you have a variety of options. If you have one of the more rigid ones, your options are a bit more limited, but you do still have them. For example, one of the best things you can do is to roll your 401(k) into an IRA. Then, you won’t be required to pay any taxes on your money until you make a withdrawal, and you’ll be able to make a withdrawal schedule or just take your money out as needed.

For those with the flexible plans, be aware that things aren’t always as good as they seem! While it’s nice to be able to withdraw money regularly or even whenever you want, your account may come complete with a steep transaction fee which you pay each time you make a withdraw. This transaction fee can sometimes be as high as $50 or more per transaction, so make sure you know the specifics of your account and are withdrawing smartly and with all full knowledge of all costs and fees in mind.

And, though we’re on the subject of withdrawing money, remember that, when possible, it’s always best to leave your money right where it is- In your 401(k) plan. That way, you may be able to access low-fee mutual funds, stable value funds, and many other benefits. Only roll over your 401(k) if it’s going to be in your best interest, and try to withdraw money as infrequently as possible, no matter what the rules and stipulations are for your account. This strategy is what is likely going to benefit you the most in the long run.

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What You Need to Know about Your 401K

401(k) plans are a wonderful investment. However, in order to make the most of them, you really need to understand a few things about how to manage them.    

To begin with, you should know that just because you leave your job doesn’t mean your 401(k) is over and done with. That’s a common misconception. You can always transfer your 401(k) to an individual retirement account (IRA) when you leave your current place of employment. That’s known as a “rollover,” and, best of all, it comes without taxes or penalties. You can even take several 401(k) plans from past jobs and consolidate them into a single IRA for convenience and maximum profit.

Secondly, you should know whether or not your 401(k) comes with a stable value fund option. If it does, then it’s probably a very good idea to take advantage of this investment opportunity. Stable value funds come with good interest rates, which are usually higher than those offered by a bank, and as the “stable” part of their name implies, they don’t fluctuate. In other words, they’re a source of safe money! Set aside as much as you’ll need for the first year or so of retirement; that way, you’ll have it there just in case.

Another thing that’s important to understand is that you really shouldn’t be touching your 401(k) for anything except retirement. The money within it is a fully protected asset, which means that creditors can’t touch it no matter what. Since you don’t know what will happen in the future- you could lose your home to foreclosure and not have that asset or be forced into bankruptcy- it’s good to have money that you know will always be there, no matter what, and that can see you through retirement.

Also keep in mind that if your 401(k) offers a stock ownership plan for employees, it can be smart to buy up at least some of that stock. If you do end up owning a lot of company stock, however, understand that you may be subject to the net unrealized appreciation tax rule. What this means is that, when you retire, you’ll be able to distribute the company stock that you hold and then only have to pay income tax on the stock and its cost basis. You’ll also be able to pay taxes on your gain when you sell the stock back, but the taxes you pay will be at a special, lowered rate. To determine if this tax law will apply to you, and if so, how to get the most benefit from it, working with a financial advisor is smart.

As you can see, 401(k) plans are complex, but when you know the ins and outs of them, they can be a lot easier to understand and deal with. If you have other questions about your 401(k) or about 401(k) plans in general, you can always talk to a financial consultant.

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