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No 401(k)? No Problem

In spite of the continued woes of the economy, small business owners are showing increased optimism about the next 12 months, according to a recent Wells Fargo/Gallup Small Business Index survey. (Source - Wells Fargo Retirement Study. November 15, 2012) However, despite their generally sunny outlook, many of them are still concerned they won’t have enough money to retire, or may have to retire later in life.

Many small business owners have delayed saving for their own retirement, choosing instead to put their resources into growing their business. And some small business owners plan on proceeds from selling their business later in life to sustain them financially in retirement. But, experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs.

Retirement plans are not limited to the popular 401(k). In fact, there are many retirement options, even for small businesses. It is critically important for small business owners to make sure they consider all their retirement options and find a solution that best suits their individual needs.

-Traditional or Roth IRA – Among the simplest and most popular ways to save for those who are self-employed, an individual retirement account (IRA) can hold a variety of investments.

-Individual 401(k) – The Individual 401(k) is worth considering for those who are self-employed or for business owners who only employ their spouse. Its relatively high contribution limits may allow you to pay less in current income taxes while saving more for retirement.

-Simplified Employee Pension (SEP) IRA – With a SEP, a small business owner can contribute and deduct up to 25% of “earned income,” up to an annual maximum of $51,000 for 2013.

-Other plans, such as a Profit Sharing, SIMPLE IRA and even defined benefit plans might be an option.

In addition to help provide a solid financial future, establishing a retirement plan may offer certain tax advantages for a small business owner. Small business owners may be able to take advantage of a nonrefundable tax credit that the federal government offers to encourage companies with 100 or fewer employees to establish and maintain retirement plans.

A retirement plan can also be flexible. Some plans allow for contributions to be skipped or reduced in lean years.

There are many different types of retirement plans, and no one plan is right for every business. While all plans can provide benefits to the business, business owner and employees, it’s important to realize that each business must be closely considered to determine which plan is the best fit. A retirement advisor can help by reviewing a business’s goals and objectives and/or existing retirement plans, and running hypothetical illustrations to help determine which plan makes the most sense. Having a retirement plan in place may help set a small business owner on course for a solid financial future.

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About the Author

Charles (Pete) Peterson, Wells Fargo Advisors, LLC
180 Glastonbury Boulevard
Glastonbury, CT 06033

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