As a business owner, life can be overwhelming. The best thing about being a business owner is that you own your own business. The worst thing about being a business owner is you own your own business. When it comes to finances, it can be even more overwhelming. Here are five tips you can use to ease the stress of your money, so you can do what you do best – which is running your business.
- Have a retirement plan.
You can set up a SEP IRA, SIMPLE IRA, 401(k) plan, profit sharing plan, defined benefit plan or a single 401(k) for your business to help you and your employees. Most business owners start with the SEP IRA. This is where you are able to put up to 25% of your net income away and that amount is completely deductible for you. Once you have employees that have been with you for two or more years, most business owners change to a SIMPLE IRA. This is a retirement plan for when you have 100 employees or under. The maximum you can contribute each year as an employee to this plan is $14,000.Most employees are familiar with and want a 401 (k) plan. A 401(k) plan is a retirement plan that allows you and your employees to put money away every paycheck. As an employer, the cost of the 401(k) is a business expense, which is tax deductible. The maximum contribution for a 401(k) plan is $20,500 and if you are over 50 years of age you can contribute an additional $6,500 each year. You can also offer a match on your 401 (k) plan and you may also want to look into a safe harbor 401(k) plan. A safer 401 (k) plan allows you as the owner, to put maximum amount away to your 401 (k) plan.
- If your kids work in your business, give them a Roth IRA.
hen you own your own business and have children you have many opportunities to teach your children about money. One of my favorite tools is the Roth IRA. You could have your children work in the business (if it makes sense and follows all child labor laws) and then you can help your child set up a Roth IRA. This can be a business expense for you and can help your kids in their future. You are paying them income for the work they do at your company and your kids can put this money in a Roth IRA. Inside the Roth IRA, you can invest in anything such as stocks, bonds, etc. You can be as aggressive or as conservative as you want. You can help your children pick their investments and have your children meet with a Wealth Advisor. The Roth IRA contribution limit per year is $6,000 and $7,000 if you are over the age of 50. But you can only contribute up to as much income as you have. So, if you only pay your child $2,000 per year, they can contribute to the Roth IRA $2,000 per year, not the $6,000. A Roth IRA is a retirement account, but the dollars can be used for college or first-time home purchases up to $10,000 without penalty. However, other restrictions, penalties and taxes may apply. This type of retirement account does have income limits and contribution limits as well.
- Have a team. Have a great business attorney, CPA, bookkeeper and Wealth Advisor. In my opinion, the leader of your team is your Wealth Advisor. The Wealth Advisor is there to make sure your estate plan is in order and your assets are in your trust. The Wealth Advisor is there to help you coordinate IRA contributions and any tax gains or losses in stocks and investments in your taxable account.
- Have a plan. Make a plan for the succession of your business and have a plan for your personal finances so you get where you want to go. A real financial plan is very personal. It isn’t a single number that encompasses what you need and where you are at. Those amounts vary from person to person. You want to have a plan, specific to your goals, and have the steps outlined within that plan to help to get you there.
- Have a cushion. Have enough liquid money in case of emergencies. You also can establish a line of credit. This is your cushion to make sure you are able to cover expenses, such as payroll, vendor payments, rent, etc. When you have built up your business to where you have positive cash flow is when you should ask for this line of credit. You want to ask for money when you don’t need it. Generally, having a line of credit doesn’t cost you money, unless you use it. Remember to plan before you truly need the money. That is the best time!
This information is for informational purposes only and is not meant as a recommendation of any kind. Please consult with a financial professional regarding your personal situation. Investing involves risk, including the risk of loss of principal. Raymond James does not offer tax or legal advice.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
A Roth IRA is tax-advantaged savings account where you make after-tax contributions and withdraw those contributions tax-free and penalty-free at any time and for any reason. You can potentially withdraw any earnings tax-free once you have met the 5-year rule and withdraw the earnings for a specific reason (age 59½, death, disability, qualified first time home purchase).