Business Owner Financial Planning
When it comes to financial planning for business owners, self-employed people have a lot of financial advantages compared to a regular W-2 employee. There are the commonly known business deductions that any good CPA can help you out with. However, what I plan to share are some financial planning opportunities for business owners and self employed people.
A regular W-2 employee may have a 401k plan at the company they work for. This can allow them to save as much as $20,500/year (under 50 years old). And for those who are 50+ years old, there’s an additional $6,500/year that they can contribute totaling $27k into either before tax or after portion of the 401k.
BO (Business Owners) and Self Employed (SE) can save that too. But they can also have a profit-sharing plan set up, along with the 401k to contribute an additional $36k+ into tax deferred accounts. This helps reduce tax liabilities even further. Visit IRS.gov for specific amounts based on the current year contribution limits.
For SE individuals looking to put money into a tax deductible retirement account, a SEP IRA may be more appropriate. This is because there are no administrative fees that are often part of a 401k profit sharing plan. The SEP IRA contribution limits for 2022, are the lesser of 25% of the employee’s compensation or $61k.
Cash Balance Pension Plans
Cash Balance Pension plans can allow high income earning business owners the ability to really deduct a large amount of money well beyond the limits of the 401k and profit-sharing plan. This is based on a person’s age. Additionally, it is in conjunction with a 401k and profit-sharing plan. A 30 year can put over $64k, in addition to the 401k and profit-sharing limits. A 66–70 year old can do over $300k in addition to the 401k and profit-sharing limits. Check out the 2022 Cash Balance Contribution Limits for specifics based on a person’s age.
For a BO having a retirement plan that has a matching contribution can also be a great way to attract better employees in a tight labor market, while still being able to benefit the business and the BO. This can be a great way to attract top talent or simply help retain the great employees a business already has.
Having a business can also be a great avenue for retirement income. This can help ease the burden of taking social security early or even at full social security age.
If you don’t need the income, social security income grows 8% each year until age 70. This can allow someone to keep the income coming in from the business while the social security benefit keeps growing for them.
Areas of Concern
If COVID shut downs in 2020 taught BO & SE anything, it’s that they need to not rely solely on cash flow to run the business.
Just like how you need an emergency fund in your personal finances, so do businesses. This doesn’t have to just sit in a savings account making nothing. This money can be invested based on the business owners risk tolerance and potential need for money. But, the key factor is that the money needs to be liquid. It should not be tied up in an illiquid investment that isn’t accessible, if the BO or SE person needs to get at the money.
There are many opportunities for financial planning of BO & SE individuals. Each person has their own goals and concerns, so there is no one size fits all. However, these ideas are some things for BO & SE to think on. Consult with a CFP®and/or CPA before deciding to implement any of these ideas.