PROTECTING YOU, YOUR FAMILY, YOUR FUTURE | CALL US TODAY! (832) 408-0505

GP Schoemakers, PLLC

Protecting You, Your Family, Your Future

BOOK AN APPOINTMENT

401k

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.

Owners of businesses (like employees and everyone else) want to make sure they 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, thinking that will be their “retirement plan.” However, this might be a mistake.

Retirement Accounts for Business Owners

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.

For example, you may consider opening a 401(k), SEP-IRA, SIMPLE, or pension plan.  This can reduce your income taxes now, while 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, which 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.

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

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, opening up a broad world of investment options.

As a business owner, you likely have a great deal of 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 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, 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 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.  Although the business can be given to the next generation through a trust or outright, there are also transition options to allow 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

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

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!

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

Don’t Miss Out on These Year-End Tax Planning Strategies

Now is the ideal time to start year-end tax planning.  Below you will find a variety of tax-saving strategies you should consider using immediately so that you can get your 2015 tax house in order well in advance of the fast-approaching holiday season.

Plan Now for a Bountiful Fall Harvest

The last thing you want to worry about during the holiday season is tax planning.  Now is the perfect time to discuss the following tax-saving opportunities with your financial team so that you can implement them in the next few weeks:

  • Check your portfolio to determine which dud stocks can be sold to harvest losses and offset gains.
  • If you’re in the 25% or higher marginal federal income tax bracket and own mutual funds in taxable accounts, check your mutual fund company’s website for projected capital gains distributions during November or December. Given six strong years for many funds, coupled with any 2015 investor defections, the distributions could be surprisingly large for some funds. You should consider selling before the ex-dividend date and moving to a similarly allocated but more tax-efficient vehicle like an exchange-traded fund (ETF).
  • Analyze your 2015 vs. 2016 projected tax liabilities and accelerate or decelerate income and capital gains accordingly.
  • Maximize contributions to your 401(k) and IRAs – if you are age 50 and over you should take advantage of the extra $1,000 (for an IRA) or $6,000 (for a 401(k)) you can contribute to your accounts in 2015.
  • Wipe out that Flexible Spending Account by incurring medical expenses.
  • Purchase an electric car.
  • Install a renewable energy source in your home such as a solar-powered water heater.
  • Refinance your mortgage.
  • Make an extra mortgage payment or two.
  • Pay estimated state and local taxes and property taxes.
  • Review and adjust your withholding and estimated tax payments to insure that you avoid underpayment penalties.
  • Determine if your traditional IRA should be converted to a Roth IRA.
  • If you are the Trustee of an irrevocable trust, you should consider whether it is appropriate under the discretionary terms of the trust agreement to disperse distributable net income (DNI) to beneficiaries in lower tax brackets.

Beware:  What may be tax-advantageous for one taxpayer may be tax-detrimental for another.  For example, the Alternative Minimum Tax (AMT) is snagging more and more taxpayers and reducing regular tax liability may increase AMT exposure.  Thus, before making any year-end tax moves, you must consult with your financial team to insure that the moves you make are the right ones.

Plan Now for an Early Gift-Giving Season

Below are some gifting ideas you can use now to benefit family, friends, your church, your alma mater or those in need:

  • Make cash gifts to family and friends – in 2015 the maximum amount an individual can give without incurring a gift tax is $14,000, married couples can give $28,000.
  • Make cash gifts to non-profit organizations.
  • Donate appreciated assets, such as stock or real estate, to non-profit organizations.
  • Set up a donor-advised fund.
  • Supercharge a 529 plan for your children or grandchildren –individuals can contribute $70,000 and couples can contribute $140,000 to a plan without incurring any gift tax; in addition, some states offer tax deductions or credits against 529 contributions.
  • In this low interest rate environment, inter-family loans are worth considering and can be a powerful tool to transfer wealth without incurring any gift or estate tax.
  • If you are considering any advanced gift planning, such as gifting through a grantor retained annuity trust (GRAT), family limited liability company or private foundation, then time is of the essence to get the trust or entity created, funded and initial gifts made before December 31.
  • If you have used up your entire lifetime gift tax exemption in prior years, note that you have gained an extra $90,000 (or $180,000 per married couple) to gift in 2015.
  • If you have an IRA and are over age 70½, need deductions and are charitably inclined, stay alert for year-end legislation that allows individuals to donate up to $100,000 from an IRA and exclude the donation from taxable income.

Begin Year-End Tax Planning Right Now

Ideally tax planning should be done throughout the year, but unfortunately most people do not even start thinking about their tax situation until late into the fall.  Doing nothing at all will leave less in your pocket and planning done at the eleventh hour may end up sloppy and incomplete.  We encourage you to consult with your financial team now so you can insure that you are taking full advantage of all appropriate year-end tax saving opportunities.

Year End Estate Planning Tip #2 – Check Your Beneficiary Designations

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season.  One area of planning that many people overlook is their beneficiary designations.

Have You Checked Your Beneficiary Designations Lately?

Do you own any life insurance policies?  If so, have you named both primary and secondary beneficiaries for your policies?

How about retirement accounts – are any of your assets held in an IRA, 401(k), 403(b) or annuity?  Or how about a payable on death (“POD”) or a transfer on death (“TOD”) account?  If so, have you named both primary and secondary beneficiaries for these assets?

What about your vehicle – do you have it registered with a TOD beneficiary?  And your real estate – is it held under a TOD deed or beneficiary deed?

If you have gotten married or divorced, had any children or grandchildren, or any of the beneficiaries you have named have died or become incapacitated or seriously ill since you made beneficiary designations, it is time to review them all with your estate planning attorney.

Beneficiary Designations May Overrule Your Will or Trust Speaking of estate planning attorneys, has yours been given and reviewed all of your beneficiary designations?

It is critically important for your estate planning attorney to review your beneficiary designations as your life changes because your beneficiary designations may overrule or conflict with the plan you have established in your will or trust (unless your state law provides otherwise, but you should certainly not rely on this).  Also, naming your trust as a primary or secondary beneficiary can be tricky and should only be done in consultation with your estate planning attorney.

What Should You Do?

Whenever you experience a major life change (such as marriage or divorce, or a birth or death in the family) or a major financial change (such as receiving an inheritance or retiring) or are asked to make a beneficiary designation, your beneficiary designations should be reviewed by your estate planning attorney and, if necessary, updated or adjusted to insure that they conform with your estate planning goals.

If you have gone through any family or monetary changes recently and you’re not sure if you need to update your beneficiary designations, then consult with your estate planning attorney to ensure that all of your bases are covered. Call or contact us for an appointment. Our experienced attorney will be happy to strategize with you.