Many business owners find saving for retirement to be challenging and frustrating. Smaller businesses, for instance, frequently experience lean years in which they believe setting aside funds for the future is neither possible nor prudent. Even larger entrepreneurial enterprises tend to focus on expansion, reinvesting most of their profits in the business rather than retirement plans. Alternatively, you assume you will be able to sell your business and use the proceeds to fund your retirement. However, even in the best economic conditions, only about one out of every five companies that enter the marketplace is sold. And many of those that sell do so for a lower price than the owner anticipated. Keeping this in mind, you may wish to purchase an annuity to help create a personal pension if your business is not sold by the time you are ready to retire or if you have insufficient savings. Many small business owners and self-employed individuals do not consider annuities because they have incorporated and believe annuities are only available to those who are still alive. Even though individuals own annuity accounts, trusts, corporations, and partnerships can still hold them. An entity may own an annuity if the contract specifies a living person as the annuitant. The agreement terminates when the last annuitant or annuitant dies, and you cannot appoint a replacement. Additionally, entrepreneurs may avoid annuities because annuity accounts owned by corporations are taxed differently than those owned by individuals. Individuals typically benefit from tax-deferred growth on annuities. Taking advantage of compounding growth, an annuity owner may choose to defer taxes for life. When they die, their estate or heirs are responsible for paying outstanding taxes. The taxation of annuities for a nonliving entity is somewhat different. The IRS classifies as “nonqualified” all annuity accounts owned by corporations. Companies, partnerships, and trusts cannot defer taxes. This status means that these accounts are subject to annual taxes based on the growth of the policy. Regardless of tax treatment, there are reasons why a business might include annuities in its financial planning. An annuity can create a predictable, guaranteed income stream to supplement Social Security and cash savings for more than 60% of business owners who report having little or no retirement savings. Most of the other benefits of an annuity are identical for natural persons and corporations. Unlike qualified retirement savings plans, an annuity does not have IRS-mandated contribution limits. Due to the absence of caps, you could add thousands of dollars to your contract at once. Annuities can also assist businesses in mitigating risk by guaranteeing rates for predetermined periods. Certain annuities, including fixed-indexed contracts, do not correlate with the stock market. Your principal is safeguarded, and you do not lose value in volatile markets. Some annuities offer optional add-ons, such as long-term care, disability, and death benefits, providing business owners protection and peace of mind. The following are potential benefits of annuities for small business owners and sole proprietors:
- No contribution limits. Individual and business tax-advantaged retirement savings plans limit the amount an owner can contribute annually. Contribution caps imposed by the IRS on annuities do not apply. Therefore, investing $100,000 or more in an annuity at once is possible.
- You can minimize your risk. There are numerous types of annuities, including those that guarantee a minimum interest rate without exposing the principal to risk. A fixed annuity pays a guaranteed interest rate for a specified period. An indexed annuity pays interest based on the movement of a market index, with a guaranteed minimum rate and a growth cap. With either type of annuity, the value of the account’s funds is unaffected by market fluctuations.
- You can ensure a steady income stream. You do not have access to an employer pension fund or retirement plan as a business owner. Nonetheless, you can use an annuity to fund your retirement. A deferred annuity permits you to postpone your income stream for several years. In the accumulation phase, the account value of the annuity grows tax-deferred.
- You can choose between a lump sum or a stream of periodic payments when you withdraw funds. You can select the length of time over which you would like to receive income from the stream of payments; this could be for a predetermined number of years or the rest of your life. Suppose you choose to receive a lifetime income stream. In that case, the amount you receive will depend on your age, gender, and the account value of your annuity. Once you begin receiving this income stream, it will be permanent.
- You can receive benefits for long-term care, disability, and death. In addition to providing income, many annuities include built-in or optional protection features that can benefit business owners.
- A common characteristic of annuities is a death benefit paid to your beneficiaries upon your passing. The amount your heirs receive depends on the type of annuity you own and the option you choose for the death benefit. Death benefits for annuities can range from a standard death benefit equal to the annuity’s value when the beneficiary files a claim to a rider whose value increases at an annual rate.
- Some annuities have optional riders. These riders allow you to access some or all of your annuity value without a surrender penalty if you are confined to a long-term care facility, disabled, or diagnosed with a terminal illness.
Take it from the Expert If you are a business owner or self-employed professional, you must accumulate assets to provide for yourself and your family when you retire or sell your business. Even if you believe you will be able to sell your business for a profit, having an annuity can still be a smart move to ensure less stress and greater peace of mind in retirement. Financial experts specializing in retirement income can help you decide if an annuity is right for you or your business.
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Phone: 5167611515
Bio:
I have worked with Deloitte Partners, Directors and Principals for approximately 30 years, saving them considerable amounts of money on their Group Term Life Insurance Premiums. We have also addressed Long Term Care within Life Insurance and Fixed Index Annuities. The Annuities Guarantee fixed interest rates and Long Term Care doubling. Protected from any corrections in the stock market. Great for retirement planning.
