How small business owners could benefit from annuity.

How small business owners could benefit from annuities

Many entrepreneurs find it difficult to save for retirement. Some years can be too lean to set aside extra money for tomorrow. And often the desire to reinvest profits into growing the business takes precedence over saving for retirement. Many self-employed people are counting on selling their businesses and using those funds for retirement.

Just because you don’t have the retirement options regular employees have doesn’t mean you as a business owner can’t save for retirement. There are several options for the self-employed. One flexible option is to purchase one or more annuities.

An annuity is a contract with an insurance company. You make a single purchase payment or a series of payments to the company. That money grows on a tax-deferred basis until you decide to cash out or turn the annuity’s account into a stream of income. The annuity can provide a lifetime stream of income or payments over a contractually defined term.

In addition to their tax-deferred status, below are some of the advantages annuities potentially hold for small business owners and sole proprietors:

No contribution limits. Tax-qualified retirement savings plans designed for individuals and for businesses typically limit the amount the owner can contribute in a year. Annuities do not have IRS-imposed contribution limits. Therefore, it’s possible to invest, say, $100,000 or more at one time into an annuity.

You can minimize your risk. There are several types of annuities, including those that guarantee a minimum rate of interest without risk to your principal. A fixed annuity pays a guaranteed rate of interest for a set period. An indexed annuity pays interest based on the movement of a market index, with a minimum guaranteed rate and a cap on growth. With either type of annuity, the money inside the account will not lose value based on market movements.

You can guarantee an income stream. As a business owner, you don’t have access to an employer pension fund or retirement plan. However, you can use an annuity to provide your retirement income. A deferred annuity allows you to defer your income stream for several years. During the accumulation phase, the annuity’s account value grows tax-deferred.

When it comes time to take income, you can choose a lump sum of your account value or a stream of periodic payments. With the stream of payments, you can choose how long you want to receive income, be it for a set number of years or for life. If you opt for a lifetime income stream, the amount you receive will be based on your age, gender and the amount accumulated in your annuity’s account value. Once you begin taking that income stream, it will be guaranteed for life.

You can receive long-term care, disability and death benefits. In addition to providing income, many annuities come with built-in or optional features that can offer a business owner additional protection.

A common feature on annuities is a death benefit that is passed on to your beneficiaries at your death. The amount your heirs receive will depend on the type of annuity you own and which death benefit option you select. Annuity death benefits can range from a standard death benefit that equals the annuity value at the time the beneficiary makes a claim to a death benefit rider, the value of which grows at an annual rate.

Some annuities also have optional riders that allow you to access some or all of your annuity value, with incurring a surrender penalty, if you are confined to a long-term facility, become disabled or are diagnosed with a terminal illness.

It is important for business owners to build retirement assets for their individual needs once they no longer have income from their business. An annuity can be a key part of their retirement income plans.