Mature man with his son in their artisanal handicraft traditional textile factory
Planning for retirement can be overwhelming for a small business owner, but the earlier you start, the smoother your transition is likely to be. — Getty Images/ AlexD75

Planning for retirement can be overwhelming, especially for a small business owner without a traditional employer-sponsored retirement plan; however, the earlier you start preparing for this chapter of your life, the smoother your transition is likely to be.

Here are some key retirement savings options you have as a small business owner, along with steps you should take as you plan for your retirement.

Retirement plans for small business owners

IRA-based plans

There are two types of plans that fall into this category for small business owners: SEP IRA and SIMPLE IRA. The SEP IRA plan is for self-employed individuals or employers who have at least one employee, and the SIMPLE IRA plan is for any self-employed individuals or employers with 100 or fewer employees. The contributors and contribution amounts are different for each plan.

Self-employed 401(k)

This plan is perfect for anyone who is a self-employed business owner with no employees. It is funded by the employer, but contributions cannot exceed $58,000 in 2021. In addition, the owner cannot take money from the plan until they turn 59 and a half years old, their plan is terminated or there is another event that qualifies them to withdraw without penalty.

Investment-only account

Anyone who is self-employed can create this type of account, though the contributions are determined by the trustee. Those who have a qualified plan who want to further their investments should consider this type of account. It is best to speak to a tax advisor for plan details, contribution amounts and tax benefits.

[Read: Employee Retirement Plans: Guide for Small Businesses]

Business owners tend to overestimate how much their business is worth, which is why conducting a business valuation is so important.

Steps for retiring as a small business owner

Determine what you want your life to look like during retirement

Business owners who are looking to retire should consider details like where they want to live in the future, how much that will cost, what other expenses they may have and where they will get their retirement income. Creating a plan can ensure that all of these important details are arranged and nothing is missed along the way.

Choose the right retirement plan

There are a lot of retirement plans available to small business owners that are not available to employees of larger businesses. There is flexibility within each plan, including who contributes, how much is contributed, what types of assets qualify under the plans, and the dates the plans can be drawn from. Considering these and other retirement needs and consulting with a financial advisor to explore each potential plan’s terms can help small business owners see which is right for them.

Prepare a business exit strategy

In addition to planning for their lifestyle goals, small business owners should also develop a strategy for their transition into retirement. The first step is determining when they want to retire. From there, they can determine key factors such as who will take over the business, whether or not they want to sell, and how much the business is worth. These details are crucial to plan ahead so there aren’t any surprises and business owners aren’t left with less than they estimated.

[Read: How to Develop an Exit Plan for Your Business]

Appraise the value of the business, assets, and investments

Business owners tend to overestimate how much their business is worth, which is why conducting a business valuation is so important. If a business owner is expecting a certain amount of money from selling the business to provide for any expenses after retirement, but the business sells for less, it can be difficult to make up for the gap. In addition, assets and investments should be appraised for the same reason. If the investments won’t produce the income needed, adjustments should be made.

Don’t touch retirement savings until needed

One of the most important things to know before retiring is the penalties for drawing from a retirement plan too early. Some plans will make the person pay a penalty fee to access funds, while others may cause the account to lose principal or interest. There is always a chance the person will lose tax benefits as well. Those with these accounts should avoid accessing the funds until they retire or they qualify by the plan to withdraw.

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