Retirement Planning for Business Owners

Retirement Planning for Business Owners

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Yes, if you own a business, you need to look into retirement planning for business owners. For many employees, saving for retirement is usually a matter of simply participating in their employer’s 401(k) plan. And, perhaps opening an IRA for some extra savings.

But, when you’re the owner of a business, planning for retirement requires proactivity and strategy. It’s not just the dizzying array of choices for retirement accounts. There’s also planning for the business itself. Who will run the business after your retirement? Additionally, your estate plan must integrate into your retirement and business transition strategy.

As a business owner, (like employees and everyone else) you want to make sure you will have enough money in retirement. Business owners recognize the value of their businesses. So, they are often tempted to reinvest everything into the enterprise. By doing this, you think that this be your “retirement plan.” However, this might be a mistake.

Retirement Accounts for Business Owners

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Rather than placing all your eggs in one basket, it makes sense to have some “backup” strategies in place. There are many retirement account options open to business owners. Although the number of options can make things confusing, a tax and financial professional can often quickly make a recommendation for you.

Company Investment Plans

For example, you may consider opening a 401(k), SEP-IRA, SIMPLE, or pension plan. This can reduce your income taxes now. These plans simultaneously placing some of your wealth outside your business. From a financial perspective, these account are tax-deferred. So, the investment growth avoids taxation until you retire. This plan greatly boosts returns.

The “best” plan really depends on how much income your business earns, how stable your earnings are, how many employees you have, and how generous you want to be with those employees. You must consider how generous you’ll be with employees because the law requires most tax-deferred plans to be “fair” to all employees. For example, you can’t open a pension or 401(k) for yourself only and exclude all of your full-time employees. When making this decision, consider that many employees value being able to save for their retirement and your generosity may be repaid with harder work and loyalty from the employees.

Self-Directed Investments

Depending on how many employees you have, you may even consider “self-directed” investment options. These options allow you to invest some or all of your retirement funds into “alternative” investment.

What are alternative investments? Think precious metals, private lending arrangements, real estate, other closely held businesses, etc. These self-directed accounts are not for everyone. But, for the right person, they open up a wide world of investment opportunities.

The tax rules surrounding self-directed tax-deferred accounts are very complex. Often, the penalties can be incredibly high. So, if you choose to do self-directed investments, always work with a qualified tax advisor.

Individual Plans

Outside of your business, you can likely contribute to an IRA or a Roth IRA. This can allow you to add more money to your retirement basket, especially if you’ve maximized your 401(k), SEP, or SIMPLE plan. Like the other tax-deferred accounts, self-directed IRAs are also an option. These open up a broad world of investment options.

As a business owner, you likely have a great deal of control over your health insurance decisions. Are you relatively young and healthy? Or, are you an infrequent user of health care services? Then consider using a high deductible health plan (HDHP) and a health savings account (HSA) to add additional money to your savings.

With these plans, you set aside money in the HSA which can be invested in a manner similar to IRAs. At any time after you setup the account, you can withdraw your contributions and earnings, tax-free, to pay for qualified medical expenses. And, after you turn 65, the money can be used for whatever purpose you want. Keep in mind that you will pay income tax on the distributions.

Selling or Transferring the Business

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Many business owners dream of a financially lucrative “exit” when a business is sold, taken public, or otherwise transferred at a significant profit for the owner. This does not happen by accident. A business owner must first create and sustain a profitable enterprise that can be sold. Then, you must coordinate legal and tax strategies to minimize the burdensome hit of taxes. You need to avoid the common legal risks that can happen when businesses are sold.

When a business is sold, the net proceeds can form a significant component of the owner’s retirement. When supplemented by one or more of the aforementioned retirement accounts. This can be a great outcome for a business owner.

On the other hand, other businesses are “family” businesses where children or grandchildren will one day become owners. Like their counterparts who will sell their businesses, these business owners must also focus on creating and sustaining a profitable enterprise. But, the source of retirement money is a little less clear.

In these cases, clearly thinking through the transition plan to the next generation is essential. A business can be given to the next generation through a trust or outright. However, there are also transition options to allow for children, grandchildren, or even employees to gradually buy-out the owner. This is great if the owner needs, or wants ,to obtain a portion of the retirement nest egg from the business.

The Importance of Estate Planning

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Regardless of which retirement accounts (401(k), SEP, SIMPLE, IRAs, HSAs) you select, it is wise to integrate them into your estate planning. You’ve probably already considered who you want to take over your business after you retire (perhaps a son or daughter or a sale to a third party). For your retirement accounts, an IRA trust is a special trust designed to maximize the financial benefit, minimize the income tax burden, and provide robust asset protection for your family. These trusts integrate with the rest of your comprehensive estate plan to fully protect your family, provide privacy, all while minimizing taxes and costs.

Leverage The Team Approach

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Let us work with you, your business advisors or consultants, your tax advisor, and your financial advisor to develop a comprehensive retirement, business transition, and estate planning strategy. When we work collaboratively, we can focus on setting aside assets for retirement, saving as much tax possible, while freeing you to do what you do best – build your business!

Give us a call today so we can help you craft a retirement, business transition, and estate planning strategy.