If you’ve just landed a new position at a startup company, retirement planning might not be the first thing on your mind. But working for a startup or small business often means taking responsibility for your own finances, including planning for retirement. Starting your retirement savings sooner rather than later gives your money more time to grow before you stop working and need it to replace your wages. The good news is you have several options to consider.
Here are a few of the best ways to save for retirement when working for a startup or small company.
Start a Roth IRA
Contributing to a Roth IRA is a good move for employees that are relatively young and have many years before they’ll need to withdraw the money. It’s also a wise choice if you’re currently in a lower tax bracket than you expect you’ll be in retirement. Unlike a traditional IRA, your contribution isn’t tax deductible, so you won’t get a tax refund for money you put into one of these plans. But earnings placed in Roth IRAs grow tax-free. So you’ll be saving taxes on 20, 30, or even 40 years of compounding returns. It’s important to note that the amount of money you can contribute to a traditional or Roth IRA combined is limited to $5,500 for 2016, or $6,500 if you’re 50 years of age or older.
Discuss Savings with Your Employer
Be up front with your new boss about retirement savings. Ask about what the company currently offers, and what they plan to offer their staff in the future. If they’re undecided about what type of retirement plans they should offer as a startup or small business, here are two suggestions.
1. Employer Matching SIMPLE IRAs
For brand new startups and small companies with under 100 employees, an employer matching SIMPLE (Savings Incentive Matching Plan for Employees of Small Employers) IRA plan could be the best retirement savings option for you and your busy employer. They are simple to set up and they’re inexpensive – two important features for new businesses and their new employees. You can make your contributions through automatic payroll deductions, and your employer has the choice to match your pre-tax contributions or a fixed percentage of your salary.
One caveat: the business can’t offer any other retirement plans if it opts for a SIMPLE IRA.
2. Equity as an Option to Use toward Retirement
Are you working for a company that offers equity in the company or profit sharing as part of your compensation? If so, hop on board.
Equity sharing through Employee Stock Ownership Plans (ESOPs) gives employees shares of a company, or ownership in the business they’re working for. This is popular with startups that are focused on their cash flow and capital expenses as they get off the ground.
Receiving shares is a nice perk for you as an employee, because it gives you the opportunity to share in the business’ future success. This is a good thing because as the company grows and becomes more profitable, your share value (and therefore your retirement savings) will also grow, tax-sheltered.
With ESOPs, your employer will make contributions of stock to a plan on your behalf – you do not contribute. Many ESOP plans are also subject to vesting restrictions. This simply means that you don’t own the shares until a noted vesting period has been reached – a strategy meant to keep employees with the business for a few years, at least.
As a small business employee, remember that even though you may not have a traditional employment situation with standard employee benefits, you still have options for retirement savings. Getting the right information today can help you make wise financial decisions for your future.