Since 2020, the U.S. has seen a record number of new businesses become a reality – over 4.4 million to be exact. And who is leading the charge?
GenX. Well, GenX women to be exact.
Data from the U.S. Census has found that “the average age of entrepreneurs is 42, with those leading the fastest-growing startups averaging 45. Generation X women, between 44-59, are predicted to make up nearly 70% of all female business owners by 2023.”
If you’re one of those many business owners, you’re used to wearing many hats—managing your business, building client relationships, and handling finances. But as your business grows, one critical aspect often gets overlooked: planning for retirement.
The good news is that you have options when it comes to retirement planning. It’s just a matter of taking action.
Why Retirement Planning is Crucial for Female Entrepreneurs
According to research, women tend to live longer than men, meaning they need more savings to sustain themselves in retirement. At the same time, many women take career breaks to care for children or family members, resulting in fewer years of earning and saving. That means you need to maximize your savings during your working years.
As a small business owner, you have the unique opportunity to create a customized retirement plan that ensures financial independence and security for the long term. Here are some retirement plan options to consider, each designed with flexibility and tax benefits in mind.
1. Solo 401(k)
Best for: Sole proprietors or business owners with no employees (except a spouse).
A Solo 401(k) is ideal for a one-person business. It allows you to contribute both as an employer and as an employee, maximizing your retirement savings potential. For 2024, the employee contribution limit is $23,000 (or $30,000 if you’re 50 or older), plus an employer contribution of up to 25% of your compensation. This dual contribution structure offers substantial tax-saving benefits.
Advantages:
- High contribution limits.
- Tax-deferred growth on investments.
- Can be set up to include Roth (after-tax) contributions, giving you tax flexibility in retirement.
2. Simplified Employee Pension (SEP) IRA
Best for: Small business owners with employees or those who want a simpler setup.
The SEP IRA is one of the easiest retirement plans to establish. As the employer, you can contribute up to 25% of each employee’s compensation, up to $66,000 for 2024. The contributions are tax-deductible, which means they lower your taxable income.
Advantages:
- Easy to set up and maintain.
- Flexible contribution amounts, ideal if your business income fluctuates.
- Employees don’t contribute; all contributions are made by the employer.
For entrepreneurs with fluctuating cash flow, the SEP IRA offers the flexibility to adjust contributions based on the financial success of your business in a given year.
3. SIMPLE IRA (Savings Incentive Match Plan for Employees)
Best for: Businesses with fewer than 100 employees.
A SIMPLE IRA is a great option if you have employees and want a plan that’s easy to maintain. Employees can contribute up to $16,000 (or $21,500 if they’re 50 or older), while the employer must either match employee contributions up to 3% of their salary or make a 2% nonelective contribution.
Advantages:
- Easy and inexpensive to set up.
- Employer contributions are tax-deductible.
- Employees are encouraged to participate, making it beneficial for retaining and attracting talent.
This plan may appeal to entrepreneurs who are looking to create an inclusive and supportive workplace that offers valuable benefits to employees without the administrative burden of more complex plans.
4. Defined Benefit Plan
Best for: High-income earners looking to make large contributions.
A Defined Benefit Plan functions similarly to a pension plan, where the employer commits to providing a specific retirement benefit based on salary and years of service. The plan is more expensive to maintain but allows for much higher contributions than other plans, sometimes exceeding $250,000 per year. These contributions are also tax-deductible.
Advantages:
- Significantly higher contribution limits.
- Predictable retirement income.
- Contributions are tax-deferred.
If you’re an entrepreneur with a high income who is close to retirement, this could be an excellent way to maximize your savings in a short amount of time.
5. Roth IRA
Best for: Business owners who want tax-free retirement income.
Although not exclusive to business owners, a Roth IRA is an excellent option if you anticipate being in a higher tax bracket in retirement. Contributions are made with after-tax dollars, but your withdrawals are tax-free in retirement. The maximum contribution limit for 2024 is $7,000 (or $8,000 if you’re 50 or older) this is $7 and $8k.
Advantages:
- Tax-free withdrawals in retirement.
- No required minimum distributions (RMDs).
- Flexibility to withdraw contributions (but not earnings) without penalty before retirement.
This can be an excellent supplement to other retirement plans, giving female entrepreneurs additional flexibility and tax advantages later in life.
Retirement planning as a business owner isn’t just about putting money aside for your future—it’s about leveraging the financial tools available to grow your wealth, lower your taxes, and create stability for yourself and your employees.
Do you have questions about what option(s) are right for you? CLICK HERE to make an appointment.
