By Mansi Singhal
Post sponsored by qplum.
I’ve been a small business owner since 2010. In 2016, I launched an online financial advisory service, qplum, where we manage money for individuals, families, and businesses. We frequently discuss with clients the importance of saving enough for retirement. Time and again, we meet clients who don’t have a secure retirement plan. The incredible statistic is that, even with low unemployment rates, 20% of Americans have very little retirement savings. That’s 65 million Americans.
For small business owners like myself, it becomes critical to not only focus on our own retirement savings, but also our employees. These are the three investment tips for business owners to consider:
The obvious choice for a retirement plan seems to be a 401(k). Plans offer benefits to the employee as well as tax incentives to the employer, but 401(k)s can be expensive for small businesses.
Administrative fees alone can run between $5K and $10K per year. Investment fees, or expense ratios, could go as high as roughly 1% per year. And there could be other operating costs that get passed on to your 401(k) plan.
It’s often difficult to determine the exact cost for running and maintaining a 401(k) plan. Fee structures are very complex. They’re typically calculated in four ways: asset based, per-person, transaction-based, and flat rate. In the end, the employer or plan participant ends up bearing the cost. For small businesses with smaller plans, there’s very little room to negotiate fees.
A great alternative to a 401(k) is a SEP IRA. SEP is a simplified employee pension IRA. Business owners with one or more employees can open one. A SEP IRA is like a traditional IRA in that contributions are made pre-tax. And one of the most lauded advantages of SEP IRAs is the increased contribution limit.
As per the IRS, you can contribute $5,500 per year to a traditional or Roth IRA ($6,500 if you’re 50 and older). Contribution limits for 401(k)s are $18,500 per year, which makes this a very attractive option. Even higher are SEP IRA contribution limits, which are $55,000 (or 25% of your salary, whichever is lesser) for 2018. And the best part is that employers can contribute for themselves.
Help your employees set up IRAs
If a SEP IRA is not in the cards, consider educating your employees on how to set up an IRA. This could be a part of a general “financial wellness” program where employees get educated about managing expenses, saving, and planning for retirement. Two main options available are a traditional IRA and a Roth IRA.
Traditional IRAs are tax-deferred, so you don’t have to pay taxes on the money until you begin withdrawing. Contribution limits, as mentioned above, are $5,500 per year. This amount is tax-deductible if you are not participating in a retirement plan at work. An additional benefit is that there is no income limit for contributing.
Roth IRAs are a little different. Contributions are made post-tax, so you can withdraw tax-free when you reach the age of 59 and 1/2. Though earnings grow tax-free, some disadvantages to having a Roth IRA are that contributions are not tax deductible and there is an income limit. According to the IRS, income limits start at $120,000 for single filers, and $189,000 for married filers.
There is a workaround often used by people who do not meet the income eligibility for Roth contributions. You can make what is called a backdoor contribution. This entails contributing to a traditional IRA and then converting it to a Roth. But, be aware, you will pay taxes on the converted amount.
Invest excess cash
Most of us have made the mistake of leaving our excess cash in a regular business checking account. Depending on the balance, an interest-bearing account usually yields around 1%-1.25%. Ideally, we want our money to work for us. But many of us can easily fall prey to fast-talking bank representatives whose primary motivation is to sell us any number of products (corporate credit cards, business loans, fee-riddled checking accounts, etc.)
Since I manage my clients’ money, I see the power of compounding first hand. This is the snowball effect that occurs when your invested money begins to generate earnings. You gain interest on your original investment amount, gains, dividends, etc. Of course, no one can guarantee returns and there are risks to investing. It is best to work with a registered financial advisor or a qualified representative to ensure that you are investing in a diversified manner.
About the Author
Post by Mansi Singhal
Mansi Singhal is the CEO of qplum. Before starting qplum, she worked on Wall Street for different banks and hedge funds. She received her master’s in computer science from the University of Pennsylvania and holds both Series 3 and Series 65 certifications.
Image courtesy of qplum
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