Retirement Savings Options for Entrepreneurs

Small business owners often neglect to save for retirement.

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The dream of quitting your job and becoming your own boss is alive and well in America. In 2009, 15.3 million Americans were self-employed. That’s one in nine workers. However, entrepreneurs don’t save nearly enough for retirement. The U.S. Small Business Administration reported that only about 36 percent of business owners has an IRA, and only a third of those with an IRA account actually contributed to it. Just 18 percent of entrepreneurs participate in a 401(k) plan. That’s understandable because it is difficult to start a business and keep it running, but retirement saving shouldn’t be neglected. Here are some ways entrepreneurs can prepare for retirement:

Grow the business. Most entrepreneurs will sink every dollar into their business to make it a success rather than save for retirement. A new small business can cost a lot of money to start and operate. It can take a while to generate positive cash flow, and even then the owner needs to take some salary to pay for the cost of living. Many entrepreneurs’ only retirement option is to sell their business when they are ready to retire. While this is a valid option, the economy is changing constantly. A successful business today might be obsolete tomorrow, so it is still important to save for retirement.

Roth IRA. One way to establish a good retirement savings habit is to save a token amount in a Roth IRA from the get go. A $50 automatic deposit to a Roth IRA every month isn’t going to make or break a business. Once a business generates more income, then it’s easy to increase that amount or move on to one of the more serious retirement saving options.

Other options to save a lot more. One great thing about being an entrepreneur is that you can save a lot more money for retirement if you choose to. Here are some retirement plans that can help entrepreneurs save more once their business is making a lot of income:

  • SIMPLE IRA. The employer must match employee salary contributions up to 3 percent or put in 2 percent for all eligible employees. The entrepreneur can be the sole employee and he or she can contribute up to $12,000 in 2013, with a catch up amount of $2,500.
  • Individual 401(k). This is also known as the solo 401(k). An individual 401(k) is similar to a 401(k) plan from an employer. The contribution limit for 2013 is $17,500, with the option of a profit-sharing add on. An entrepreneur can contribute an additional 20 percent to 25 percent of their salary to this plan. The combined amount can’t be more than 100 percent of your pay or exceed $51,000 in 2013. If you are over 50, then you can contribute an extra $5,500 in catch-up contributions.
  • SEP IRA. An entrepreneur can save up to 25 percent of self-employment income in a SEP IRA up to the max of $51,000.
  • One of the downsides of being an entrepreneur is that retirement saving often gets neglected. That is understandable when a business is just starting out and is struggling to survive. However, once a business becomes more stable, an entrepreneur should not neglect saving for retirement. Even a token amount contributed to a Roth IRA is a good start.

    Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing, and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.