Small Business Saving Strategies

There’s a lot of autonomy that goes along with running a small business or being a part of an independent practice such as a law or medical group. But calling the shots also brings with it a fair share of headaches.

Steve Cohen, CFP and chief executive of Port Washington-based Gold Coast Advisors says the two complaints that he most frequently hears from clients in this boat are that they’re paying too much in taxes or want to save more for retirement – usually both.

These may seem like big hurdles to overcome. But the good news is, if you’re running your own business there may be more options at your disposal than you think — and exploring them could mean a significant boost in your retirement savings and a smaller tax bite.

“A lot of people tend to view only the mass market [retirement] solutions…But there are a lot of other strategies out there to sock away more money…If you’re a doctor, lawyer or someone with an independent business, it’s easier to do these strategies than if you were an employee of IBM,” Cohen said.

Most small businesses use some form of an IRA-based retirement plan such as a SIMPLE or SEP IRA, or a defined contribution plan such as a solo or traditional 401(k). While these provide a solid foundation for retirement savings, there are often complementary strategies that small, mid-size and independent businesses can use to enhance savings and tax advantages.

One such strategy that Cohen believes can be highly advantageous – but is often overlooked for smaller businesses – is the good ole pension plan.

While pensions are usually associated with large companies they can actually be set up for any business with one or more employee.

To set up a pension plan, the employer commits to contributing a certain amount of money to the plan and hires an actuary to determine how the plan will be funded for each employee.

The biggest perk of pension plans is that they allow you to contribute much more than any other retirement plan. This translates into a great tax benefit for the business because it can deduct the contributions from income. And for the employee(s), not only are you getting the guarantee of a fixed income stream in the future, but it has the potential to be substantially greater than if you were enrolled in a 401(k) or IRA.

It’s not hard to see how this combo of benefits could be particularly advantageous if you’re running a one-man shop.

To sweeten the deal further, you can couple a pension plan with other retirement plans, which basically allows you to double down on your savings.

If this sounds too good to be true, here’s the downside. Setting up a pension plan can be a lot more labor intensive than other plans and can therefore be much more expensive. That’s why it’s important to do your homework and consult a financial expert before deciding which plans is the right fit.

For a comparison of IRAs, defined contribution plans and pension plans, check out the Department of Labor website.

In addition to standard retirement plans, Cohen said that in some cases annuities may also be a viable option to beef up retirement savings.

There are various types of annuities and they can be structured in countless different ways. But for simplicity sake: an annuity is a product sold by an insurance company that allows you to contribute money (the earnings of which generally grow tax deferred) and in return, receive periodic payouts at some point in the future.

Though annuities have gotten a bum rap for their high expenses, Cohen said, insurance companies have been doing a better job over the last few years and “over the next three to five years they are likely to get some enhancements that will probably make them a bigger piece of the [retirement savings] pie.”

There are also insurance-related strategies that could act as a complement to retirement saving. Whether you’re a good candidate for these, though, will depend on various factors including whether you’ve already maxed out your other options and your cash flow.

For people who are a good fit, Cohen warns: Make sure you buy the right product. Often, he said, insurance companies try to sell retail products to high net worth individuals who don’t know any better.

“People shouldn’t be settling for that…those are products that are off the shelf tend not to have the best features…if an insurance agent is pushing a product, chances are it’s probably not the right decision in general and especially if it’s a high net worth individual.”

jennifer woods

Jennifer Woods is a Long Island-based personal finance columnist and author. She writes on a variety of financial topics such as wealth management, retirement planning, real estate, investment strategies, tax preparation and estate planning. Her articles have been featured in leading financial publications including The Wall Street Journal, Dow Jones Newswires, and In 2010, Penguin Group published her book The Active Asset Allocator: How ETFs Can Supercharge Your Portfolio.