Small Business Owners Often Overestimate Ability to Retire

A majority (52%) of small business owners state they are either “very” or “fairly” well prepared for retirement, according to a study by The Guardian Insurance & Annuity Company (GIAC).

The study suggests there is an increasing number of small business owners (SBOs) planning to use small business equity to help fund their own retirement. Thirty-five percent of SBOs polled by GIAC state they started their business specifically to fund their retirement, up from 25% in 2011. Thirty-nine percent believe they can retire earlier than planned due to their small business, up from 31% in 2011. 

One troubling finding from the study shows 35% of SBOs today are relying on the sale of their business in order to be fully prepared for retirement. But amid their confidence about retirement security, only 17% have actually taken steps to identify potential buyers for their businesses. This exposes a disconnect between retirement preparedness and aspirations among SBOs, GIAC observes. 

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Overall, SBOs polled for the study are risk-tolerant and feel that having their own business is the best way to create the wealth they want. However, more planning is necessary in order for these aspirations to match their retirement needs.

“Many small business owners are counting on the sale of their business to fund their retirement, but this expectation comes with a great deal of risk,” says Douglas Dubitsky, vice president, Guardian Retirement Solutions. “The best approach is to work with the right financial professional who will design a customized plan and provide a clear understanding of how it will meet their retirement goals.”

Half of the respondents report they spoke to their financial adviser when building a retirement outlook. Additionally, 84% say they are very satisfied or satisfied with their financial adviser, and 83% plan to keep their adviser when they retire. SBOs who use a financial adviser are more confident in their ability to sell their business and retire successfully, GIAC says. 

The survey denotes a disparity in responses depending on gender, as 45% of women SBOs confess they are confident about and financially prepared for retirement, compared to 56% of men. Additionally, women are more likely to prefer an adviser who pushes them toward their goals (33%), compared to men (23%). Men are more likely to want an adviser who is creative and takes calculated risks (28%) compared to women (21%).

“Women SBOs can do more to prepare for retirement and feel as confident as their male counterparts,” Dubitsky says. “A retirement savings plan is an essential tool for any small business owner’s financial security. Yet, it needs to be put into motion many years before retirement.”

The full results of the “Small Business Owners Retirement Readiness Study” are available here.

IRS Clarifies One-Per-Year Limit on Tax-Free Rollovers

The Internal Revenue Service issued guidance clarifying the impact a 2014 individual retirement account (IRA) rollover has on the pending one-per-year limit imposed on tax-free rollovers.

The clarification relates to a change, announced by the IRS earlier this year, in the way the statutory one-per-year limit applies to rollovers between IRAs. The change reflects an interpretation by the U.S. Tax Court in a January 2014 decision (Bobrow v. Commissioner) applying the limit to preclude an individual from making more than one tax-free rollover in any one-year period, even if the rollovers involve different IRAs.

Before 2015, the one-per-year limit applies only on an “IRA-by-IRA” basis, the IRS explains. That is, only two or more rollovers involving the same IRA will trigger a violation. Beginning in 2015, however, the limit will apply by aggregating all of an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.

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To help taxpayers by allowing time for transition to the new interpretation, the IRS announced shortly after the initial January 2014 Tax Court decision that the new interpretation would not apply before January 1, 2015.

In Announcement 2014-32, posted November 10 on IRS.gov, the IRS makes clear that the new interpretation will apply beginning January 1, 2015. The IRS says that a distribution from an IRA received during 2014 and properly rolled over (normally within 60 days) to another IRA will have no impact on any distributions and rollovers during 2015 involving any other IRAs owned by the same individual. This will give IRA owners a “fresh start” in 2015 when applying the one-per-year rollover limit to multiple IRAs, the IRS says.

Although an eligible IRA distribution received on or after January 1, 2015, and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment. As the supplementary guidance states, a rollover between an individual’s Roth IRAs will preclude a separate tax-free rollover within the one-year period between the individual’s traditional IRAs, and vice versa. 

As before, Roth conversions (rollovers from traditional IRAs to Roth IRAs), rollovers between qualified plans and IRAs, and trustee-to-trustee transfers—i.e., direct transfers of assets from one IRA trustee to another—are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

IRA trustees are encouraged to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.

More information on the rule change can be found on www.IRS.gov by typing typing “IRA” in the search box, according to the IRS.

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