A Business Owner’s Flight Plan for Retirement

Debra RoubikBusiness Analyst Small Business Development CenterSeptember 5, 2012

A Business Owner's Flight Plan for Retirement

Inevitable Phases of a Business

Owner

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbiting

Landing

A Business Owner's Flight Plan for Retirement

Inevitable Phases of a Business

Owner

Need a Plan to Reflect the Stage

you are in!

Why Be Concerned About Retirement?

Why Be Concerned About Retirement?

Why Be Concerned About Retirement?

OR

Why Be Concerned About Retirement?

“IRA ownership rate for business owners is only about 36 percent,

and only one-third of business owners with an IRA contributed for the

2005 tax year. Less than 2 percent of business owners own a Keogh

plan. Only about 18 percent of business owners participated in a

401(k)/Thrift plan.” --Small Business Administration, Office of Advocacy

Recession has exacerbated a lack of retirement savings as

business owners have been forced to withdraw funds to keep

afloat

My experiences as a business owner and financial analyst

A Business Owner's Flight Plan for Retirement

Launch Phase

Did you know that you may be able to use your current

retirement funds to invest in your own company?o Take a loan against the funds– Restricted according to your fund

o Cash out the funds– Penalties, taxes and loss of retirement

savings

o Investment Retirement Financing

A Business Owner's Flight Plan for Retirement

Launch Phase

Retirement Investment Financingo CURRENT 401(k) or IRA

o Balance of over $50,000

A Business Owner's Flight Plan for Retirement

Launch Phase

Form a new corporation (C-Corp) as per the ERISA and IRS requirements. A Limited Liability Company, Partnership or S Corporation usually will not meet the required guidelines.

Have the new corporation adopt a company retirement plan that allows investment in the corporation.

Roll-over your current retirement plan(s) in to this new retirement plan.

Direct that new retirement account to invest in the stock of the new business.

The retirement plan holds the company's stock on its balance sheet and pays dividends to those shares (back into the plan) or buy those shares back at a later date at a much higher valuation.

Risks

Do this wrong and you risk paying taxes on your retirement

savings as well as facing hefty penalties.

Be very cautious about using your nest egg for a business

start-up. You could lose it all!

Fees for setting this up run as much as $5,000.

Such investments fall into a gray area of the law, according

to tax experts. So, consult with a tax attorney or a

company specializing in this type of funding.

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosterso Pre-launch and launch support is gone. So, the goal is to control

expenses and focus on increasing sales.

o Lack of time, funds.

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosterso Payroll Deduction IRA

o Payroll Deduction Roth IRA

o SEP (Simplified Employee Pension) IRA

o Profit Sharing

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosterso Payroll Deduction IRA

• Limited to $5,000• No incentives to employees to hang on and help grow

the company or increase profitso Payroll Deduction Roth IRA

o SEP IRA

o Profit Sharing

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosterso Payroll Deduction IRA

o Payroll Deduction Roth IRA

• Taxes paid on contribution– not when withdrawno SEP IRA

o Profit Sharing

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosterso Payroll Deduction IRA

o Payroll Deduction Roth IRA

o SEP IRA

• All employees over 21 who have worked 3 out of the last 5 years and earned over $550 a year are eligible

• Contributions flexible, but must be same percentage of compensation

• Employees can still add up to $5,000 a year to another IRA account

• No paperwork or testing o Profit Sharing

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosterso Payroll Deduction IRA

o Payroll Deduction Roth IRA

o SEP IRA

o Profit Sharing

• DISCRETIONARY contributions • Flexibility• Vesting can be formulated to retain employees during

tumultuous times

Costs of Profit Sharing

Fees for trustee, service administrator.

Nondiscrimination testing: Cannot treat higher-performing

employees different from rank-and-file. But, you can base

the contributions on percentage of income.

Must be diligent with documentation.

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbitingo Solid growth rates

o Standardizing procedures

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbitingo SIMPLE (Savings Incentive Match Plan for Employees) IRA

o 401(k)

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbitingo SIMPLE (Savings Incentive Match Plan for Employees) IRA

• Can be a SIMPLE IRA or SIMPLE 401(k)• Must have less than 100 employees earning at least $5,000

and no other retirement plan• Employer either MATCHES salary deferrals of employee

following a legal formula or contributes a non-elective 2% of compensation

• No nondiscrimination or top-heavy testing for SIMPLE IRA. But, form 5500 must be filed for SIMPLE 401(k)

o 401(k)

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbitingo SIMPLE (Savings Incentive Match Plan for Employees) IRA

o 401(k)

• .A salary-reduction program for employees • Flexibility in picking contributions by employer (Profit

sharing or matching)

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbiting

Landingo Defined Benefit Plan

o 412 Plan

o Self-directed IRA

o Employee Stock Ownership Program

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbiting

Landingo Defined Benefit Plan

• Provides for specific amount at retirement• Contribution based on actuarial assessment of eligible

employee’s ages, salaries and interest rate environment• Contributions could be high

o 412 Plan

o Self-directed IRA

o Employee Stock Ownership Program

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbiting

Landingo Defined Benefit Plan

o 412 Plan

• Must be funded in annuities and life insurance• Better for highly taxed, profitable companies

o Self-directed IRA

o Employee Stock Ownership Program

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbiting

Landingo Defined Benefit Plan

o 412 Plan

o Self-directed IRA

• Allows owner to make own investment decisions in non-traditional markets

o Employee Stock Ownership Program

A Business Owner's Flight Plan for Retirement

Launch Phase

Separation from the Solid Rocket Boosters

Orbiting

Landingo Defined Benefit Plan

o 412 Plan

o Self-directed IRA

o Employee Stock Ownership Program

• Not a good program for the business owner, but a great way to “pass down” the company for exit planning

• Employees retirement not diversified• Costs at least $40,000 to set up

Summary

Great source to navigate your choices:

IRS Retirement Plans Navigator

http://www.retirementplans.irs.gov/

References

http://

www.businessmoneytoday.com/bootstrapping/retirement-fu

nds.php

http://guides.wsj.com/small-business/funding/how-to-tap-an

-ira-or-401k-to-help-fund-a-start-up

/

http://www.dol.gov/ebsa/pdf/profitsharing.pdf

http://www.sba.gov/advocacy/7540/12260