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May
09
2008
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Financial Strategies for Small-business Owners |
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by Reprinted with permission of Investment Representative Celine Richardson of EdwardJones
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Friday, 09 May 2008 |
 If
you're a small-business owner, you put your heart, soul - and most
of your time - into your business. Unfortunately, sheer hard work
doesn't always translate into financial security - so you'll need
to take some additional steps.
Here
are a few to consider:
Protect
your business against the loss of a key employee. If you have
an employee with valuable management or sales skills, and this person
were to die unexpectedly, your business could suffer. That's why
you may want to write a "key-person" life insurance plan on this
employee. In its simplest form, key-person coverage pays cash to
your company, which is usually the policy beneficiary, when the
designated employee dies or becomes disabled. Key-person insurance
also can be structured to fund deferred-compensation arrangements
or buyout agreements between partners.
Avoid
"raiding" business coffers to pay for personal expenses. Try
to keep six to 12 months' worth of living expenses in a liquid account.
Once you have established this "emergency fund," you'll be less
likely to tap into your business' income or assets to pay for unexpected
personal expenses, such as a new appliance, a costly car repair
or a large medical bill.
Create
a retirement plan for yourself. As a business owner, you're
responsible for establishing your own retirement account. Fortunately,
you have some attractive choices, including the following:
- SEP-IRA - You can contribute up to 25 percent of your compensation
- as much as $46,000 - to a SEP-IRA. Your contributions are
tax deductible and your earnings have the potential to grow
tax-deferred until withdrawn. This plan offers you significant
flexibility in making contributions for yourself and your employees.
Plus, as an employer, you can generally deduct, as business
expenses, any contributions you make on behalf of your plan
participants.
- SIMPLE IRA - You can put in up to $10,500 - or $13,000 if
you're 50 or older - to a SIMPLE IRA. As is the case with the
SEP-IRA, your earnings have the potential to grow tax deferred.
You can match your employees' contributions dollar for dollar,
up to three percent of compensation, but no more than $10,500
(or $13,000 for employees 50 and over). Alternatively, you could
contribute two percent of each eligible employee's compensation
each year, up to a maximum of $4,600, regardless of whether
the employee contributes or not. Contributions to your employees
are tax deductible.
- "Owner-only" 401(k) plan - If you have no employees other
than your spouse, you can establish an "owner-only" 401(k) plan.
Between salary deferral and profit sharing, you can contribute
up to $46,000, in pre-tax dollars, to your owner-only 401(k),
or $51,000 if you're 50 or older. Like a SEP-IRA and SIMPLE
IRA, a 401(k) provides the potential to accumulate tax-deferred
earnings. But if you open a Roth 401(k) your earnings have the
potential to grow tax free, provided you've had your account
at least five years and you don't start taking withdrawals until
you're at least 59-1/2. (However, you make Roth 401(k) contributions
with after-tax dollars.)
Your
tax or financial advisor can help you decide which retirement plan
is right for your business. But don't wait too long to choose one,
or to make the other moves necessary to help you make progress toward
your financial goals. When you own a business, time flies - so make
the right moves today.
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