Retirement for Business Owners
Corona business and estate planning attorney Joseph Hudack knows that 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 extra savings. But, when you’re a business owner, 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 “Retirement for Business Owners.”
Owners of businesses (like employees and everyone else) want to ensure they have enough money in retirement. Business owners recognize the value of their businesses, so they are often tempted to reinvest everything into the enterprise, thinking that will be their “retirement plan.” However, this might be a mistake.
Retirement Accounts for Business Owners
There are many retirement account options open to business owners. Although many options can be confusing, a tax and financial professional can often quickly recommend you. Rather than placing all your eggs in one basket, having some “backup” strategies in place makes sense.
The “best” plan 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. For example, consider opening a 401(k), SEP-IRA, SIMPLE, or pension plan. From a financial perspective, these accounts are tax-deferred, so the investment growth avoids taxation until you retire, significantly boosting returns. This can reduce your income taxes now, while simultaneously placing some of your wealth outside your business.
It would help if you considered 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 saving for their retirement, and your generosity may be repaid with harder work and loyalty from the employees.
Self-Directed
Depending on how many employees you have, you may even consider “self-directed” investment options, which can allow you to invest some or all of your retirement funds into “alternative” investments, such as 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 vast world of investment opportunities. The tax rules surrounding self-directed tax-deferred accounts are complex, and penalties can be incredibly high. So, if you choose to make self-directed investments, always work with a qualified tax advisor.
You can contribute to an IRA or a Roth IRA outside of your business. 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, opening up a broad world of investment options.
As a business owner, you likely have much control over your health insurance decisions. If you’re relatively young and healthy or otherwise an infrequent user of health care services, consider using a high deductible health plan (HDHP) and a health savings account (HSA) to add additional money to your savings. These plans let you set aside money in the HSA, which can be invested like IRAs. At any time after you set up 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, although income tax will need to be paid on the distributions.
Selling or Transferring the Business
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, legal and tax strategies must be coordinated to minimize the burdensome hit of taxes and 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 retirement accounts discussed above, this can be an excellent 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. Still, the source of retirement money is a little less clear. In these cases, thinking through the transition plan to the next generation is essential. Although the business can be given to the next generation through a trust or outright, there are also transition options for children, grandchildren, or even employees to gradually buy out the owner if the owner needs or wants to obtain a portion of the retirement nest egg from the business.
The Importance of Estate Planning
You’ve probably already considered whom you want to take over your business after you retire (perhaps a son or daughter or a sale to a third party). Regardless of which retirement accounts (401(k), SEP, SIMPLE, IRAs, HSAs) you select, it is wise to integrate them into your estate planning. 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 and provide privacy while minimizing taxes and costs.
Leverage the Team Approach
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 and saving as much tax as possible while freeing you to do what you do best – build your business!
Contact Hudack Law today at (877) 314-4309 Toll-free, please visit areas of service (open link in a new tab) or hudacklaw.com (open link in a new tab) so we can help you craft a retirement, business transition, and estate planning strategy.