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Financial Planning for Business Owners


Financial Planning for Business Owners in Tennessee

At TrustCore, we often see that a business owner’s personal life and business life are tightly interlinked. Business owners are seldom “off-the-clock.” Every decision is likely run through a filter of, “How will this impact my business?” This diligence is a proven strategy for professional success; however, when it comes to your personal finances and retirement planning, focusing all or most of your energy on your business needs alone can be problematic.

At TrustCore, financial planning is all about merging your professional and personal lives. For business owners in Tennessee, this means taking a holistic view of your finances and how your business fits into the larger picture. There are unique considerations and opportunities that come from owning your own business that should be incorporated into your overall financial plan.

Whether you’re preparing for retirement, considering healthcare coverage for you and your employees, or trying to find your way out of the small business tax maze, the TrustCore financial planners are here to help. This guide looks at some of the key financial planning elements that many Tennessee business owners unfortunately often overlook.

If you have a concern that is not addressed here or would like to discuss your specific situation in more detail, contact us and get a conversation started!

Chapter 1

Retirement Planning for You, the Owner

As a business owner, you have several options when it comes to retirement plans. There are 5 retirement plan options for self-employed and business owners:

  • Traditional or Roth Individual Retirement Account (IRA)
  • SEP IRA
  • SIMPLE IRA
  • Solo 401(k)
  • Defined benefit plan

Each plan has its advantages and disadvantages. Here is an overview of each type:

Plan Type IRA SEP IRA SIMPLE IRA Solo 401(k) Defined Benefit Plan
 

Plan Coverage

Available to anyone, self-employed or otherwise Beneficial for small business owners with less than 20 employees For small business owners with 100 or fewer employees For self-employed individuals with no employees other than a spouse Beneficial for self-employed individuals with no employees
Advantages Contributions can be pre-tax (in a Traditional IRA) or after-tax (in a Roth IRA)

 

Easy to set up and no reporting requirements

 

Can withdraw your contributions from a Roth IRA at any time without penalty once the account is 5 years old

Easy to set up and no reporting requirements

 

High contribution limit

Easy to set up and no reporting requirements

 

Beneficial for larger businesses

 

Employees can make their own contributions

Highest contribution limits

 

Operates like a standard, employer 401(k)

 

Spouses who are also employees can contribute to their own plan up to the standard employee 401(k) limit

Allows you to set aside more money than a Traditional 401(k) or IRA
Contribution Features Contribute up to $6,000 in 2021 or $7,000 if age 50 or older Pre-tax contributions up to $58,000 in 2021 (plus a $6,000 catch-up contribution if over age 50) or 25 percent of compensation, whichever is less

 

 

Contribute up to $13,500 ($16,500 if age 50 or over) in 2021 You get to contribute both as an employee and employer up to $58,000 in 2021 (plus a $6,000 catch-up contribution if over age 50) or 100 percent of earned income, whichever is less

 

Contributions are based on age, expected investment return and desired retirement benefit
Employee Options No employee coverage, although employees can set up their own plan Employees cannot contribute to their own accounts. Instead, employers must contribute the same percentage to the accounts of each eligible employee as you do to your own account. Employees can contribute through salary deferral.

 

Employers are also generally required to match employee contributions up to 3 percent of employee compensation or contribute a fixed 2 percent to every eligible employee regardless of employee contribution.

No employee coverage except for spouses who are also employees Available for employees.

 

Employer usually contributes on employees’ behalf.

Disadvantages Low contribution limit

 

Penalties for early withdrawal

 

Income limits on who can contribute

Most SEPs require employers to contribute the same percentage to their employees’ plans as their own. Employers are generally required to make contributions to employee accounts.

 

Contribution limits are also lower than with a SEP IRA or Solo 401(k).

More complicated to set up and requires annual reporting to the IRS once your account is over $250,000

 

No distributions until age 59-½ or another trigger event, such as plan termination

Employers assume all investment risk and responsibility for employee accounts, which is why these plans are preferred by business owners with no employees.

Why People Put Off Their Retirement Planning – And Why That’s a Big Mistake!

Chapter 2

Retirement Plans for Your Employees

As a business owner, you’re not just responsible for your own retirement planning, but also that of your employees. This is a big responsibility, and one that requires careful consideration.

You are not required to offer a retirement plan to your employees. However, doing so can be a good way to attract and retain top talent. The IRS also provides eligible small business owners a tax incentive of up to $5,000 for three years to help cover the necessary costs of starting a SEP IRA, SIMPLE IRA or qualified plan like a 401(k). This tax credit reduces your taxes on a dollar-for-dollar basis.

When choosing a retirement plan for your employees, consider who your employees are and what type of retirement plan options they may prefer. For instance, would your employees benefit more from a plan where they make their own contributions or one where you contribute on their behalf?

The number of employees you have can also be a deciding factor. Small businesses with fewer than 20 employees may do better with a SEP IRA, whereas businesses with between 20 and 100 employees might prefer a SIMPLE IRA, which allows for employee contributions. Refer to the above section to help determine which retirement plan is best for your employees, and discuss your options with a financial planner to make sure you fully understand your decision.

Business Owners: Is Your Employee Retirement Plan Benefiting You Too?

Chapter 3

Family-Run Businesses

Family-run businesses come with a myriad of rewards, but they can also add layers of complexity to your financial planning, especially where retirement is concerned. At TrustCore, one of the biggest challenges we see family-run business owners face is stepping down from a leadership role in the business. Creating a succession plan well before your planned retirement date can help ease this transition for everyone involved.

Start developing a succession plan by identifying the key employees within your family-run business who could step up after you leave. Be honest with yourself and others during this process. Many business owners dream of their children taking over the reins after they retire, but not every child wants to go into the family business, so you may need to look further out to identify the right person or people to succeed you. Once you’ve identified your successors, you can begin transitioning responsibility to them in the years leading up to your retirement.

Discussing your plans with a financial planner can help you navigate tax implications, inheritance questions and other financial effects of leaving your business. For example, it may make more sense to transition ownership gradually rather than all at once. The financial planners at TrustCore can help.

5 Ways to Avoid Conflict in a Family-Run Business

Chapter 4

Healthcare

The Affordable Care Act (ACA) requires businesses with 50 or more full-time employees to offer affordable health insurance to their employees. Failing to do so could result in a penalty from the IRS. Even if you have fewer than 50 employees, offering health insurance can be beneficial to both you and them, through tax incentives and higher employee satisfaction. Eligible business owners can receive tax breaks on up to 50 percent of the cost of their employees’ health insurance premium.

That said, providing employer-sponsored health insurance can be costly. Before you decide to offer a plan to your employees, ensure that you can afford it – both now and in the future. The cost of health insurance tends to increase over time, not decrease. Make sure you plan ahead and have a strategy for how you’ll be able to pay future bills.

Chapter 5

Taxes

Taxes are a part of life for anyone who earns income, but they can be a particular headache for business owners. Tax regulations and tax planning for business owners can be complex and confusing. A tax professional and financial planner can help you navigate the confusion and create a tax plan for your business.

If you are a business owner in Tennessee, be prepared to pay three separate business taxes: Federal business taxes, state business taxes and city business taxes. The amount of taxes you pay will depend on how your business is structured and whether you are a retailer or wholesaler.

Small businesses with one owner pay 13.3 percent in federal taxes on average, but this increases to 23.6 percent for partnerships and 26.9 percent for small business corporations. In Tennessee, your business tax rate depends on the classification of your business, which is determined by your dominant business activity in each location. Retailer business tax rates in Tennessee range from 0.05 to 0.1875 percent, depending on classification, while wholesaler business tax rates range from 0.025 to 0.0375 percent.

Chapter 6

Your Exit Strategy

Business succession planning is an essential part of any business owner’s financial plan – and an often overlooked one!

Your business is likely the largest asset in your estate. How you handle it after you leave your business can have a major impact on not only your future but also the future of your business.

Think about who will step into your role when you leave. If you own a family-run business, this may be your children or another relative. Whoever you have in mind, make sure to speak with them as early as possible to ensure they’re interested in assuming the responsibility. This will also give you time to help guide them into a management role.

If you choose to sell your business, it’s prudent to start preparing at least one year in advance. The more time you have to prepare, the better.

However you leave your business, it’s important to carefully consider its impact on your financial picture. Selling could have tax and estate planning ramifications. If you plan to use the proceeds as a source of retirement income, you’ll need to have a plan for how to invest and allocate those assets after the sale.

5 Misconceptions Business Owners Have About Retirement

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Chapter 7

Why a Financial Planner Can Help

A financial planner can be a huge asset to any business owner in Tennessee. There are many ways a financial planner can add value to your financial planning process, from helping you navigate the complexities of retirement planning as a business owner to finding ways to mitigate taxes and create an exit strategy that gives both you and your business the greatest chance of future success.

A financial planner can also provide an objective perspective on your business and its role in your financial life. This can be especially beneficial when succession planning, as emotions often run high during this time.

If you’re looking for a financial planner to help guide you through the financial planning process, schedule a no-obligation conversation with the TrustCore team to see how we can help.

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