Many small-business owners believe that their company will provide all that is necessary for a comfortable retirement. As their golden years approach, they eagerly anticipate selling their creation and living off the proceeds. Unfortunately, business owners who rely on the sale of their businesses for retirement income may ultimately be disappointed. This is because, as the current recession has highlighted, not all businesses will stand the test of time and those that do may not be sold at a profit. Small business owners who have no backup plan may find themselves at retirement age with nothing to live on.
This illustrates why it is always a good idea for a small business to have a qualified retirement plan. Furthermore, the end of the year is a great time to establish one, as yearly profits can be sheltered in the plan to create tax savings. For example, a corporate owner or self-employed person, whose salary or net earnings meet certain requirements, can contribute a maximum of $49,000 to a SEP (Simplified Employee Pension) plan, thus scoring an immediate tax deduction while simultaneously saving for later years. Under the Internal Revenue Code, these saved funds will continue to grow tax free until the person reaches retirement age, after which the distributions will be taxed at the taxpayer’s current income tax rate.
Owners that are looking to establish a qualified retirement plan for their companies should complete the process by December 31. They will then have until the extended due date of their 2011 return to make their contributions for the year. There are a number of retirement plans that can be used by small businesses; however, some legal requirements, such as minimum coverage standards for employees, will make certain plans inappropriate in some circumstances. Interested owners would be well-advised to discuss the wide range of plan options with a knowledgeable business and tax attorney who can help to determine the right plan for their company’s needs, both now and in the future.