Entrepreneurial Money Management

Marci talks about the financial issues & concerns business owners’ face when running their own company.

IRAs or 401Ks, what's Smarter for a Business Owner

  • Comments 3

I'm not a financial advisor, nor do I want to be. I just want us all to be able to retire comfortably and as rich as possible, so that's why I'm going out on a limb to share what I know about saving for retirement.

Here's what I have learned about saving for retirement after owning my own sole proprietor business, owning a company with employees, selling a business and then going back on my own as a sole proprietor:

1) Max out everything. There are limits to how much you can contribute "pre-tax" which is what you should max out. You can read about those limits for 401K saving here, IRAs here and here if you are into Roth IRAs. Since they are fairly low numbers ($5-6K for IRAs, and $16,500 for 401Ks) you should fully fund those every year with pre-tax dollars. You can have a Roth IRA and a traditional IRA to double your tax free contribution.

2) Do 401k matching with your employees. In addition to providing a nice employee perk, it cuts your company's overall employment tax burden and gives you some extra savings into your IRA. Please talk to your financial advisor about how this works.

3) Pay yourself a decent salary. Many of us are tempted to skimp on our salary to cut recurring expenses. However, you wind up goofing up your social security payment amount by doing this. In the off chance that the market gives us another kick in the pants on the eve of your retirement, you will want to have every chance for income available upon your last day in the office. You can also put some of your salary away as investment savings in money market funds if you want to double-dip the returns on that cash. If you save your salary amount, you receive social security plus returns from the investment.

4) If you sell your business, put at least 80% of your net proceeds at the time of the sale into a moderate to conservative savings plan. When I sold my business, I popped my money right into real estate (August of 2007... oops) and promptly lost a bunch of it when the market crashed. If you are on an earn-out purchase agreement, save all of that down payment because it is unlikely that you will receive your full earn-out. Even when both parties enter the agreement with the best intentions, the seller rarely makes the full buy amount on an earn-out.

Selling your company *is* your retirement plan, so make sure you keep that money.

These are my insights based on my own experience. If any of these ideas has sparked your interest, please talk to a qualified financial advisor to help plan these ideas into your retirement scenario. 

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  • I think IRA plans for smaller companies are easier to set up and are far more flexible.  I think I would check IRA plans first.

  • One thing to also consider is that a 401-K can include shelter from lawsuits for the business owner.  IRA's do not provide the same asset protection.

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