By MARKET MATTERS BY BRIAN HEPP
Your ideas are fresh, the plan is complete and you’re ready to begin building your business. While your dreams of becoming an entrepreneur may seem to be right around the corner, consider the challenges before you leap too far. On the road ahead, there could be financial uncertainty and loss, but even in the land of risk, debt and development, abandoning your nest egg is a mistake. While investing in your new business may be the first thing on your mind, don’t forget about funding your future.
Establish balance by starting slow. You will never be able to nurture your nest egg if you are easily enticed by the fancy stuff. The last thing you need is a large overhead, so you may want to consider starting slow, perhaps working out of your home in the first few years and limiting the amount of equipment you buy. Research and development costs are inevitable, but remember, this process can be quite effective, even without the latest gadgets.
Diversify your assets. You should save for retirement separate from your business. Relying solely on the proceeds from the sale of your business down the road is a very risky strategy for retirement planning. The business cycle is quite unpredictable, so it is impossible to predict what someone will pay for it in the future. Take advantage of the many ways you can grow your nest egg savings on a tax-deferred basis, as well as reduce your personal taxes.
Establishing an owner-only 401(k) plan may be a great place to start because this type of retirement plan is structured for those who want to increase their retirement savings while keeping plan administration costs low. This is a good fit for the new entrepreneur because to establish this type of retirement plan, the company cannot employ anyone other than owners and their spouses. In 2006, an owner can make an employer contribution of up to 25 percent of his or her eligible compensation — an individual’s eligible compensation cannot exceed $220,000 for 2006 — in addition to his or her salary deferral contributions of $15,000. All contributions have the potential to accumulate tax-deferred and salary deferrals decrease the owner’s taxable income. It is important to remember that the combination of employer and employee contributions cannot exceed 100 percent of the owner’s compensation or $44,000. Also, owners 50 years old or older can make an additional $5,000 catch-up contribution for 2006.
Of course, this is just one retirement plan option to consider. The most important point is that you invest time and energy into your new business while nurturing your nest egg just the same. In a time of increased competition and market volatility, you never know what the future may hold. Be prepared. (Brian Hepp is a financial consultant for Santa Monica-based A.G. Edwards & Sons, Inc. Member SIPC. He (310) 453-0077 or at A.G. Edwards is a full-service retail brokerage firm that offers a complete spectrum of financial products and services, including stocks, bonds and mutual funds, financial retirement planning and tax-advantage investments.)
Originally published in the Santa Monica Daily Press print edition on March 23, 2006. Read the original PDF.