Is your company your 401(k)?

Hey there, Ben here. Last week we added up the guarantees with your name on them. This week is about the retirement plan a lot of owners don't have, because the business has always been the plan.

Ask most owners about retirement and you'll hear some version of "I'll sell the company someday." Maybe. But say that day comes and the business is worth less than you hoped, or a buyer only wants it if you stay three more years, or your health decides the timing for you. If the company is your only retirement plan, all of it rides on one sale at one moment. Meanwhile, there are retirement plans built for business owners that a lot of contractors never set up, simply because nobody sat down and walked them through it.

Should some of your profit be going into a retirement plan instead of back into the business?

This is a plain-English map, not tax advice. Contribution limits change every year and the right plan depends on your entity, your income, and your crew. Take this list to your CPA.

1. Know the main plan types exist. Owners commonly look at a SEP IRA, a Solo 401(k) if there are no employees besides you and your spouse, a company 401(k) with profit sharing, and for some higher-income owners, a cash balance plan. Each has different limits, costs, and rules about covering employees. You don't need to pick one today. You need to know the menu, so the conversation with your CPA starts from options instead of a blank stare.

2. Count the employee piece before you choose. Some plans require you to contribute for eligible employees too. That's a cost, but it can also be a recruiting and retention tool in a tight labor market. Say a plan costs you $30,000 a year in employee contributions. Weigh that against what it costs to replace one good foreman.

3. Compare against "just keep it in the business." Money left in the company is exposed to company risk and may be taxed now. Money in a qualified plan generally grows tax-deferred and, in many cases, sits further from business creditors. Say you put $50,000 a year into a plan for 15 years. That's $750,000 contributed, before any growth, that doesn't depend on the sale.

4. Pair it with your pay system. From Issue 3: base pay, tax reserve, quarterly true-up. A retirement contribution can become one more line in the true-up. Say a strong quarter leaves extra profit. A set slice goes to the plan before anything else gets spent.

5. Set a deadline. Plan setup and funding deadlines vary by plan type, and some must be in place before year-end. Say you wait until April to ask. You may have already missed the window for the year you wanted to cover. It's mid-November, so getting the question to your CPA this month gives you the most options. Waiting rarely helps here.

Email your CPA four questions: Which owner retirement plans fit my entity? What would each cost me for employees? How much could I contribute this year? What's the deadline to set one up? Copy and paste them. Done. If your CPA says "we'll talk in March," ask for fifteen minutes before December instead.

The Invest section of the free Contractor Wealth Scorecard checks whether you're building anything outside the company, retirement included.

Take the free Scorecard →

Hit reply and tell me: do you have a retirement plan outside the business today, yes or no? I'll share the anonymous tally in a future issue.

Talk soon,
Ben

P.S. Before you email your CPA, take the free Scorecard. It takes about 8 minutes, and your Invest score gives you a good starting point for that conversation.

Contractors Digest is for general educational purposes only and is not legal, tax, accounting, or investment advice. Talk with your own qualified advisors before making decisions for your business or family. Dollar examples are illustrative only.