Taking Charge of Your Own Destiny Comes with a Price

By Marc C. Shaffer

Life has changed and many have changed their mindset along with it. One major point of change has been careers – what they can offer, what’s important to you and what career it will take to live the life you want. During the pandemic, many people realized the desire for greater flexibility in their life and decided to start their own business. Pandemic entrepreneurs.

According to Prudential’s Pulse of the American Worker Survey conducted this year, “1 in 5 workers changed their line of work entirely over the past year,” and they did so looking for better work-life balance, better compensation and the desire to try something new. A Salesforce article noted, “According to the Census Bureau, more than 4.4 million new businesses were created in the U.S. during 2020 — the highest total on record. For reference, that’s a 24.3% increase from 2019 and 51.0% higher than the 2010-19 average.”

New entrepreneurs may have been attracted to controlling their own time, their own destiny, their work hours and work-life balance. Perhaps they’ve always wanted to solve a problem and now seemed like a great time to start, or they wanted to use their creativity to spark a business. They probably considered how their endeavor would impact their time, their current lifestyle and their cash flow.

Aside from the lifestyle considerations, there are also new financial considerations such as setting your budget, your own salary, factoring in costs you don’t think about such as covering the full amount FICA tax or funding your entire healthcare coverage. They might not have been the first thing that comes to mind when starting a business, but these topics come up quickly, as do the costs associated with them.

What you probably didn’t think about as much, is how becoming an entrepreneur creates the burden of completely being in charge of your financial future, specifically, your retirement ‘nest egg.’ No longer is there a retirement plan set up for you by your employer that you can easily fund each paycheck, and possibly even earn additional money that they match on your behalf. You are now in charge of understanding the types of plans, setting them up for your business (and your employees), and funding the account for your future.

With this responsibility comes flexibility; you can choose the right type of plan for your situation, assuming you want to save more than is allowable in an Individual Retirement Account (IRA). What you don’t want to do is ignore your future, using the excuse that you’re currently building a business. It’s too easy to keep putting this off if you don’t start your new endeavor on the right financial foot for all aspects of your life.

So, what are some of the common options for a small business owner? Remember, these rules and values can change each year.

Simplified Employee Pension (SEP) IRA – With a relatively easy set-up, relatively low fees and relatively easy rules, this could be an attractive option. You can contribute up to 25% of your income, with a 2021 cap of $58,000. A SEP may be better if you plan to remain your only employee or are open to other options if you bring on additional employees. Employers who set up a SEP IRA are required to contribute the same percentage to each employees’ account, including theirs as the owner. Therefore, this plan may become cost prohibitive if you plan to add additional people to your team in the future.

Savings Incentive Match Plan for Employees (SIMPLE) IRA – Additional rules and restricted investment caps make this more appealing to those who will hire employees. This account can grow with your business and limit employer contributions when compared to the SEP IRA. The 2021 contribution limit is $13,500 unless you qualify for catch-up contributions.

Individual 401(k) – This plan is available to sole proprietors and spouses that work in the business can also contribute. It can be a great way to save large amounts, as the 2021 limits are 25% of your compensation plus your employee contribution, with a maximum of $58,000.

If you have started a business or are thinking about it, make sure a retirement plan is factored in and that you keep retirement a priority as you grow your business.



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The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on October 27, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.