Retirement planning for business owners

[firehous]

So I'm processing my options for setting up an IRA for the first time and figured lots of you have gone down this road.

[By the way, this post may be more relevant to US-based members.]

Here's my understanding of the "3 flavors":

Traditional IRA - You put money in and it grows tax deferred. When you withdraw (at retirement), you pay taxes on what you put in.

Roth IRA - You put money in and pay taxes at that time. Money grows tax deferred and you don't pay any taxes at retirement.

SEP - Same as Traditional only you can put much more in.

...

So what are you guys doing and why?

-Costas

PS - Just wanted to cover the "I know I should talk to my accountant/financial planner on specifics."

[LiquidReflex]

Since you have the "I know I should talk to my accountant" there, I don't have to start out with that. Obviously, everyone is a little different when it comes to what is best for them ... some like high-risk, some like low-risk, some need access to the funds for emergencies, some won't need it for 40 years ... so what I do may not be good for anyone but me (but that's not your question).

Personally ... I do all 3 actually. I have a traditional IRA through my current employer which I contribute the maximum they match. I have a SEP IRA set up for my personal business that I contribute the max amount I can each year, currently separated into 3 different funds. Then I also contribute to a Roth IRA when I can during the year. The latter I don't max out as I just can't afford that much (just bought a new house) but when I can, I put some away for the year. I suppose if you want to get technical, the house I just bought is part of my retirement planning as well.

Any financial professional will tell you to start early as it will benefit you in the long run. Even if it's a small amount, it will grow by the time you retire. So I guess I'd say no matter what method you choose (IRA's, stocks, bonds, etc), try to put at least something away each month for your future.

[amf45]

You also forgot 401(k) and Keogh (sp?) plans.

I use a SEP-IRA now, because that's what my accountant thought would allow me to put away the most money from my business.

[supermighty]

Check out The New Roth 401(k) Versus The Traditional 401(k): Which Is The Better Route? at The Simple Dollar. Also Get Rich Slowly has good information on saving money.

[rcj662]

Sep Ira and 401 k are best because you can put the most money away each year.

Roth is good if you have low taxes and regular ira is nice to lower taxes you pay.

I have both roth and regular Iras. I started them before business then set up Sep and now use that.

[firehous]

Nice examples and interesting links guys.

As for funding multiple accounts, that makes sense - so how do you decide which to fund first (or primarily)?

A part of me feels like I'm overanalyzing and should just move forward with *something* to start.

-Costas

[dvduval]

My plan is to switch for LLC to corporation, and use 401k.

[amf45]

As for funding multiple accounts, that makes sense - so how do you decide which to fund first (or primarily)?

Doesn't really matter. First, decide how much of your money you want to put away each year for retirement. Then divvy that amount up amongst whatever accounts are appropriate (depending on the rules). Which account gets how much is really secondary to deciding how much of your leftover cash you want to put away toward retirement.

[Sagewing]

Doesn't really matter. First, decide how much of your money you want to put away each year for retirement. Then divvy that amount up amongst whatever accounts are appropriate (depending on the rules). Which account gets how much is really secondary to deciding how much of your leftover cash you want to put away toward retirement.

Details like that REALLY matter! The way that you fund your accounts and choose which ones to fund will be subject (hopefully) to many years of gains and interest, so these small decisions right now can mean lots of money in the future.

As for us, we have a few things going. For our main company (which is an s-Corp) my wife and I have a SOLO 401(k) (also known as 'individual 401k) which is just like a standard 401k but has much higher contribution limits (up to 44k+ from the corp + 15k personal) and is only available to business with no non-owner employees (the rules are complicated but that's the main one). The solo/indy 401k is NOT the same as '401k', it's more like a SEP IRA so ask your accountant if this is a good option.

My wife also keeps an IRA going and funds it each year with other income that she has coming in, although she's disqualified from using that fund recently. I had an old IRA but I rolled it into our Solo 401k.

We also use an HSA (Health Savings Account) in combination with HSA insurance which we fully fund each year then pay all of our expenses out of pocket. This allows us to defer a little bit of cash each year for the contribution (which comes from the corp, so it's an above-the-line contribution) and if we need that cash we can use it for medical expenses. The great thing is that if we DONT need the cash, we can let it accumulate and grow tax-free and when we reach retirement age it will essentially become like an IRA and we can take disbursements without penalty.

Finally, we have a trust around many of our assets and are creating a favorable situation with regards to estate planning, etc.

This week we are planning on chatting with our CPA about moving to a ROTH 401k, since it's easier to qualify these days. This is a tricky decision because it requires you to project your earnings (and thus tax rate) far into the future, but it's certainly a great option!