Retirement & Investing Strategies for Small Business Owners
This year has brought about unprecedented challenges for small businesses. As your truly local credit union, CommunityAmerica Credit Union cares deeply about small business owners and supporting the Kansas City small business community. Our Wealth Advisors at Wealth Management by CommunityAmerica are here to help with saving and investing ideas to keep in mind as you plan for your business's financial future.
One important priority for financial business planning is setting up retirement savings, for both you and your employees. There are a variety of plan options, depending on the size of your business. Here's a quick breakdown of some of the more popular choices available through Wealth Management by CommunityAmerica:
- Self-Employed or Solo 401(k) - Ideal for someone who is self-employed or owns a business with no other employees, this plan is funded by employee deferrals and employer contributions. Contribution limits can often be higher than traditional accounts, and employers may contribute up to 25% compensation (up to a $57,000 max in 2020). However, you can't withdraw from the plan until an allowable event occurs, such as reaching a certain age, a disability or plan termination.
- SEP IRA - This type of account is funded solely by employer contributions, so it's best for someone who is self-employed or owns a small business with only a few employees. An SEP IRA is easy to set up, and contributions can often be higher than traditional IRA accounts. Though it has more requirements for participation, it does come with tax deductions for contributions the employer makes for employees.
- Simple IRA - Works well for an individual who is self-employed or owns a small business with 100 or fewer employees. Both employee deferrals and employer contributions make up the funding for this type of IRA. This plan is also easy to set up, has minimal participation requirements and comes with tax deductions for contributions the employer makes for employees.
- IRA/Roth IRA - This path is especially attractive for sole proprietors and is available in both a Traditional IRA and Roth IRA. With the Traditional IRA, your contributions are tax-deferred, which means you pay taxes when you withdraw funds for retirement. With a Roth IRA, contributions are made with after-tax dollars. So, when you withdraw funds for retirement, it will be tax-free.
Remember, Wealth Management by CommunityAmerica does not offer tax advice and you should consult your tax professional.
Real Estate Considerations
There's a lot to take into account when it comes to deciding between buying and leasing a business space, such as your business's life stage, growth potential, the local real estate market and even your own personal life plans. But if you feel your company is stable, has a strong financial footing and you have long-term plans for the future, there are some reasons to consider purchasing a permanent home for your business:
- Use as a Retirement Investment - Owning the property gives you the option down the road to sell the company but keep the real estate as a way to provide some extra support to your retirement plans.
- Generate Rental Income - Depending on your business's size and space needs, having the opportunity to rent out parts of a building or warehouse to tenants can help subsidize the monthly mortgage payments.
- Fixed Cost Mortgage Payments - Purchasing property means you'll have a fixed monthly mortgage payment, so you won't have to worry about increasing rent prices. Although you'll have to make a down payment up front, it will help you avoid the uncertainty in pricing and availability that comes with leasing from a landlord.
- Space Customization - With renting, you may find yourself facing more restrictions and limits on what you can do with a space than when you own the property outright. Being your own landlord gives you the freedom and flexibility to make the building work for your business needs.
While there are benefits to purchasing property, there are pros to leasing as well, such as less responsibility for building maintenance and repair. Leasing also gives you more flexibility to move to a new location and keep more cash flow on hand in the present. As with any important choice, you'll want to look at your business's needs, financial situation, and future goals before making a purchasing decision.
And while investing in your business is important, so is diversification. Entrepreneurs and small business owners can find themselves facing concentration risk in financial planning if they overly invest in just one asset, i.e. their business venture. To avoid this, you may want to consider redirecting some of your savings and assets from the business into personal portfolios to avoid having all of your wealth tied to the performance of the business. Be careful not to invest only in closely related industries and businesses simply because those are the ones you feel most able to evaluate and understand. Instead, try to build a portfolio with more variety in asset classes and risk profiles. Ultimately, look to create a more diverse strategy of integrating your business interests with more liquid, complementary options, which can help protect against unexpected market movements.
Whether you're interested in setting up a retirement plan or seeking advice on how to diversify your investment risk, the Wealth Advisors at Wealth Management by CommunityAmerica can help you devise a sound investment strategy. And for more business solutions, from business checking and savings accounts to merchant services and financing, check out CommunityAmerica Credit Union's business banking services.