Use of Retirement Plans by Entrepreneurs Is Low


A report by the SBA's Office of Advocacy found that fewer than 2% of small business owners had a Keogh (self-employed) plan and only 18% participated in 401(k) plans.  Only about 36% had IRAs, and just one-third of them made an annual contribution for the 2005 tax year (the most recent year in the report).

What does this say about small business owners?  The report does not indicate the reasons for not contributing, but here are some that I can think of:

  1. Owners are unaware of the tax advantages to saving for retirement through qualified plans and IRAs;
  2. Owners are cash-short and unable to fund these plans;
  3. Owners are too tightfisted to contribute on behalf of employees, something they would have to do in most cases if they wanted to personally benefit from retirement plans;
  4. Owners don't want to bother with the paperwork, investment responsibilities, and other details of having a plan;
  5. Owners expect to sell their businesses as a way to create retirement funds.

The report did find that busness owners were more likely to have a retirement account if they were older, non-minority, better educated, and with an established business or more than one business.  The report also learned that being a male busines owner reduced the probability of IRA ownership from 35.6% to 31.2% but increased the probability of having a Keogh or participating in a 401(k) plan from 1.7% to 3.7% and from 17.4% to 20.3%, respectively.

Even though the deadline for setting up a 401(k), profit-sharing, or most other types of qualified retirement plans for 2009 ended on December 31, 2009, if you have not yet filed your income tax return for 2009 and determine that your business was profitable in 2009, you can still create and fund a Simplified Employee Pension (SEP) until the extended due date of your return.  For example, if you are a sole proprietor with a filing extension for your 2009 return, you have until October 15, 2010, to put tax-deductible funds into a SEP for 2009.  Your contribution limit for 2009 is up to $49,000, but your actual contribution depends on your earnings and funds on hand for making the contribution.  If you have employees, you'll have to contribute to accounts for them.  For details about SEPs and other retirement plans, see IRS Publication 560, Retirement Plans for Small Business.



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