Mastering your retirement: tips and strategies for small business owners

Starting a business can provide unique opportunities to pursue a passion and support yourself or your family. But for many, it's also a nonstop commitment. If you've had time to think about retirement at all, you might imagine yourself working in the business in some capacity until the end.

The Federal Reserve Bank of Minneapolis reports that many small business owners are now working into their 60s, 70s, or beyond. Financial necessity may be part of the decision, but many are also in good health and find meaning in their work.

Some business owners alternatively plan to pass on the business to a family member or sell it and live off the proceeds. These can be viable options, but you'll want to think through the process and timing far in advance.

Additionally, consider setting aside money in tax-advantaged retirement accounts while working in your business. These funds can be important if your hand is forced because of an unexpected health, financial, or economic crisis.

Compare types of retirement plans for small businesses

You're not alone if you haven't set up a retirement account yet.

The Fidelity 2023 Small Business Retirement Index found that only about a third of small businesses offer retirement plans. Among the two-thirds that don't, the business owners said they couldn't afford one (48 percent), are too busy to set one up (22 percent), or aren't sure where to start (21 percent).

The process can actually be relatively easy and inexpensive if you don't have full-time employees. As you grow, the decision becomes more complicated, but new tax credits might cover most (or all) of the initial costs.

At a high level, there are three common options:

• IRA-based plans: Individual retirement accounts (IRAs) generally aren't sponsored by a company. However, your company can help employees set up IRAs and offer contributions. Self-employed business owners may also benefit from higher annual contribution limits with SIMPLE and SEP IRAs.
• Defined-contribution plans: Small businesses can choose from several types of defined contribution plans, including various 401(k)s and profit-sharing plans. The plan may define when and how much you need to contribute to your employees' accounts.
• Defined benefit plans: A defined-benefit plan is more like a pension with specific benefits for retired employees. These plans can require relatively expensive startup costs and large annual contributions, but they may be a good option for small business owners with a high income

Your reporting requirements, contribution limits, and contribution requirements for employees can vary depending on the type of plan. The Department of Labor has a chart with a side-by-side overview of the common types of accounts within each group.

New tax credits options for small businesses that start retirement plans

The SECURE 2.0 Act of 2022 was signed into law at the end of 2022, and it expands and adds several business tax credits that can help offset the cost of setting up and running a retirement plan.

Eligible businesses with fewer than 50 employees may be able to claim:

• Up to $15,000 in startup costs: A tax credit can offset up to 100 percent of the administrative costs for setting up a new retirement plan. There is a $5,000 annual limit, and you can claim the credit for each of the first three years.
• Up to $1,500 for automatic enrollment: A $500 annual tax credit for up to three years if you add an auto-enrollment feature to your retirement plan. Automatic enrollment may also be mandatory starting in 2025.
• Up to $1,000 per employee for contribution: Claim up to $1,000 per employee based on how much you contribute to their retirement plan. The credit applies for your first five years with the retirement plan, and it gradually goes from covering 100 percent of your contribution amount in the first two years to 25 percent in the fifth.

The tax credits are also available if you have 51 to 100 employees. However, the credit's value may be based on a smaller portion of your eligible costs—50 percent rather than 100 percent of startup costs, for example.

Consider your long-term exit plan

A retirement plan can help you and your employees save for the future, but you still need to consider what that future will look like. Whether you plan on slowing down or selling, starting the process early can be important.

Learning to delegate and finding a successor can be a good first step that allows you to cut back. You might be able to hold onto shares and have some influence without any operational responsibilities. But even if you decide to sell, the buyer might want someone who can run the day-to-day operations during the transition. That could be you, but it doesn't have to be if you train a successor.

When it comes to selling a small business, there are often three potential buyers: employees, family members, or strangers. There are pros and cons to each—including whether you want the business to be an ongoing dinner conversation.

Even if you don't plan to sell for several years, try to get everything in order ahead of time. Some businesses experience a slump as the owners age and become less interested or capable, leading to a lower sale price or no sale at all. Spending a few years strengthening your revenue streams and creating clear systems and processes for buyers might help you fetch a great price.

Get professional guidance

For many small business owners, retirement planning is a two-part process.

First, you can save as you go in a retirement plan. As an added benefit, offering retirement plans to employees can help you stand out as a good employer, making it easier to attract and retain top talent. Then, you can step back and become a passive investor or sell all your shares and cash out when you want to retire.

Finding the right balance between the two can be tricky as you choose between reinvesting profits into your business to increase its value or investing in your retirement accounts. There are also lots of decisions that can impact your cash flow and tax rates along the way.

But you don’t need to do everything on your own. A retirement specialist can help explain the pros and cons of different retirement plan options and dedicated plan consultants offer one-on-one management and compliance services.