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Small Business Owner's Guide to Retirement Planning

Updated: Aug 24, 2023

Small Business Owner's Guide to Retirement Planning

As a small business owner, planning for retirement may be outside the top of your priority list. However, it is crucial to start thinking about retirement early on, especially as a small business owner, where you may have different benefits or retirement options than larger corporations.

Retirement planning involves setting aside funds for your future to ensure financial security and stability when you decide to retire. Small business owners often need to pay more attention to this essential task due to their many responsibilities and day-to-day operations. However, by planning for retirement, small business owners can create a comfortable retirement and enjoy their post-retirement years without any financial worries.

This article will cover the critical steps small business owners must take when planning retirement. We will discuss the various retirement planning options available, such as individual retirement accounts (IRAs), 401(k) plans, and Simplified Employee Pension (SEP) plans. We will also provide tips for selecting the right financial advisor and creating a retirement plan that aligns with your business goals and values.

In the following sections, we will also discuss how to manage contributions and distributions to your retirement plan and avoid common mistakes that small business owners often make.

By the end of this article, small business owners will better understand the importance of retirement planning, the various options available, and the best practices for creating a retirement plan suitable for their business needs.

Understanding Retirement Planning for Small Business Owners

As a small business owner, understanding the different retirement options is crucial when planning your future. Here are some of the most common retirement planning options for small business owners:

Individual Retirement Accounts (IRAs)

IRAs are a type of retirement account that individuals can set up to save for retirement. There are two types of IRAs: traditional and Roth. Traditional IRAs allow contributions to be tax-deductible, while Roth IRAs allow for tax-free distributions in retirement.

Simplified Employee Pension (SEP) Plans

A SEP plan allows business owners to contribute to their retirement accounts and their employees. SEP plans are straightforward to set up and have high contribution limits. This type of plan is similar to a traditional IRA but allows for higher contribution limits.

Solo 401(k) Plans

Solo 401(k) plans are retirement plans for self-employed individuals and small business owners with no employees other than a spouse. These plans offer high contribution limits and the ability to borrow against the plan.

Profit-Sharing Plans

A profit-sharing plan is a type of retirement plan that allows businesses to share their profits with employees through contributions to a retirement plan. The contribution amount is based on the company's earnings for the year.

When deciding which retirement plan is right for your small business, it is essential to consider the following factors:

  • Your business structure: Depending on your business structure, you may be limited in the types of retirement plans you can offer.

  • Contribution limits: Different plans have different contribution limits, so choosing a plan that allows you to contribute the maximum amount possible is essential.

  • Administrative responsibilities: Some plans require more administration than others, so it's essential to consider the amount of time and effort needed to manage the plan.

  • Tax implications: The tax implications of each plan can differ, so it's essential to understand each option's tax advantages and disadvantages.

By understanding the different retirement planning options available and considering the various factors when choosing a plan, small business owners can create a retirement plan that best fits their needs and goals.

Creating a Retirement Plan for Your Small Business

Creating a retirement plan for your small business is essential to securing your financial future. Here are the key steps to take when creating a retirement plan for your small business:

  1. Evaluate your current financial situation: Before creating a retirement plan, you need to know where you stand financially. Evaluate your assets, debts, and income to determine how much you can contribute to your retirement plan.

  2. Choose a retirement plan: Evaluate available options and choose the plan that best fits your business structure, contribution limits, administrative responsibilities, and tax implications. A financial advisor can help advise you on which retirement plan to choose.

  3. Set up the plan: Once you've chosen a retirement plan, you'll need to set up the plan and enroll eligible employees. You'll also need to decide how contributions will be made and how often.

  4. Educate employees: It's essential to educate your employees about the retirement plan and how it works. This includes providing information on contributions, vesting, and distribution options. But, again, a financial advisor can alleviate this if you prefer someone else to take on that task.

  5. Monitor and review the plan: Retirement plans should be monitored and reviewed regularly to ensure that they are meeting the needs of the business and employees. You should also check the plan to see if any changes to your business or tax laws exist. Again, a financial advisor can alleviate this if you prefer someone else to take on that task.

In addition to these steps, here are some tips for maximizing retirement plan benefits:

  • Start early: The earlier you start saving for retirement, the more time your investments have to grow.

  • Contribute the maximum amount possible: Take advantage of the contribution limits for your retirement plan to maximize your savings.

  • Diversify your investments: Diversifying your investments can help reduce risk and increase potential returns.

When selecting a financial advisor to help you with your retirement plan, it's essential to consider the advisor's qualifications and experience. Two types of advisors to consider are 3(21) investment advisors and 3(38) investment managers.

Wolfpack Wealth Management - What are the differences between a 3(21) Investment Advisor & a 3(38) Investment Manager

3(21) Investment Advisor vs 3(38) Investment Manager
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A 3(21) investment advisor provides investment advice and recommendations to the plan sponsor but does not have discretionary authority over the plan's investments. On the other hand, a 3(38) investment manager has complete discretionary control over the plan's investments and is responsible for selecting and monitoring the plan's investments.

When selecting an advisor, consider the advisor's fiduciary responsibilities, experience, and investment philosophy. For example, a 3(38) investment manager may offer more comprehensive investment services, but it's essential to consider the additional costs and fees associated with their services.

By creating a retirement plan that aligns with your business goals and values and selecting a financial advisor that meets your needs, you can help secure a comfortable retirement for yourself and your employees.

Managing Retirement Plan Contributions and Distributions

Managing contributions and distributions is a critical part of retirement planning for small business owners. Here's what you need to know:


  • Determine contribution limits: Each retirement plan has different contribution limits, so knowing how much you can contribute each year is essential.

  • Schedule automatic contributions: Setting up automatic contributions can help ensure you contribute regularly.

  • Take advantage of catch-up contributions: If you're over 50, you can make additional "catch-up" contributions to your retirement plan.

  • Monitor contribution limits: Monitoring your contributions to ensure you stay within the annual contribution limits is essential.


  • Know the distribution rules: Each retirement plan has different rules for when distributions can be made, so it's essential to understand the rules for your plan.

  • Consider a qualified distribution: A qualified distribution is a distribution that meets specific requirements and is not subject to penalties or taxes.

  • Avoid early withdrawals: Withdrawing money from your retirement plan before age 59 1/2 can result in penalties and taxes.

  • Consider a Roth conversion: Converting a traditional retirement plan to a Roth plan can offer tax advantages and flexibility in retirement.

Tax implications:

  • Understand tax deductions: Depending on the type of retirement plan you have, your contributions may be tax-deductible.

  • Know the tax implications of distributions: Distributions from retirement plans are generally taxable, so it's essential to understand the tax implications of each distribution.

  • Consider a rollover: Rolling over a retirement plan to another plan or IRA can offer tax advantages and flexibility.

By understanding how to manage contributions and distributions and the tax implications, small business owners can maximize the benefits of their retirement plan and help ensure a comfortable retirement.

Avoiding Common Retirement Planning Mistakes

Retirement planning for small business owners can be complex, and mistakes can be costly. Here are some common mistakes that small business owners make when planning for retirement and how to avoid them:

Mistake 1: Not starting early enough

Many small business owners plan for retirement later in life, making saving enough for a comfortable retirement challenging.

Tip: Start planning early. The earlier you start saving for retirement, the more time you have to grow your investments and save for your future.

Mistake 2: Not diversifying investments

Failing to diversify investments can expose small business owners to unnecessary risk and limit potential returns.

Tip: Diversify your investments. Consider investing in various assets, including stocks, bonds, and real estate, to reduce risk and increase potential returns.

Mistake 3: Failing to review and update retirement plans

Many small business owners must regularly review and update their retirement plans, resulting in no longer suitable plans for their needs.

Tip: Review and update your retirement plan regularly. Make sure your plan is aligned with your business goals and values, and adjust it as needed.

Mistake 4: Failing to take advantage of catch-up contributions

Small business owners over 50 can make additional "catch-up" contributions to their retirement plan, but many fail to take advantage of this opportunity.

Tip: Take advantage of catch-up contributions. If you're over 50 years old, consider making additional contributions to your retirement plan to help maximize your savings.

Mistake 5: Not seeking professional advice

Small business owners may lack the experience and knowledge to create and manage a successful retirement plan, which can lead to costly mistakes.

Tip: Seek professional advice. Consider working with a financial advisor specializing in retirement planning to help ensure your plan is on track.

Real-world examples of the consequences of these mistakes include small business owners who delayed planning for retirement and found themselves unable to retire comfortably or those who failed to diversify investments and suffered significant losses during market downturns.

By avoiding these common retirement planning mistakes and seeking professional advice, small business owners can create a retirement plan that aligns with their needs and goals and helps secure a comfortable retirement.

Your Takeaways

In conclusion, retirement planning is crucial for small business owners who want to ensure a comfortable retirement and financial stability in their post-retirement years. Small business owners can secure their financial future by understanding the different retirement options, choosing the right plan, and managing contributions and distributions effectively.

It's never too early or too late to start planning for retirement. But, as a small business owner, acting today can help ensure you have the resources you need to enjoy your retirement without financial worries. Working with a professional advisor and taking advantage of available resources allows small business owners to create a retirement plan that aligns with their needs and goals.

We encourage small business owners to start planning for retirement today and take advantage of the many resources available. By creating a solid retirement plan and taking steps to avoid common mistakes, you can help ensure a comfortable and secure retirement.

P.S.: We serve small business owners in Los Angeles, California & Denver, Colorado, surrounding areas, and nationwide too, so if you're a small business owner in these areas and looking for retirement planning guidance, we're here to help!


Ready to take control of your financial future? Schedule your free financial assessment and discover how working with a wealth management advisor is accessible and helpful in reaching your financial goals. Start building the future and wealth you deserve.

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