As a business owner, running a business and its day-to-day challenges can be a relentless task. Because of this, numerous business owner’s put-off or fail in preparing for their own retirement.
Fortunately, there are several retirement options available to satisfy the individual needs of a business owner and their business. When structured properly these options can assist a business and its owner(s) in reducing income taxes, retain and recruit key employees, and create a secure retirement saving strategy.
There are several strategies business owners can take advantage of to accumulate assets for retirement for both themselves and their employees. These solutions range from basic, well-known strategies to more advanced, lesser known concepts.
The most basic form of structuring an employer-sponsored retirement plan include “traditional” retirement plan options – these options include 401(k) plans, SEPs, Profit Sharing Plans, and Simple IRAs. The benefits of implementing one or more of these types of plans is it allows owners and employees to accumulate retirement assets in a tax-efficient environment. In most cases, contributions are made on a pre-tax basis, and accumulate on a tax-deferred basis. Only at distribution are contributions to these plans taxed.
Traditional retirement plans are a great first step to building retirement savings.
The second level of retirement planning for business owners is to establish a nonqualified deferred compensation plan. A nonqualified deferred compensation plan can help business owners accumulate assets above and beyond the funding limits of a traditional retirement plan.
Nonqualified deferred compensation plans can provide key employees with additional income during retirement. It also allows key employees, currently in a higher tax bracket, with the ability to defer income taxes to later years.
Like traditional retirement plans, there are several different nonqualified deferred compensation plans available depending on the business and its employees. Nonqualified deferred compensation plans include (but are not limited to) Section 162 Bonus Plans, salary deferral plans, SERPs (supplemental executive retirement plans), and split dollar life insurance, amongst others.
Nonqualified deferred compensation plans should be considered when traditional retirement plans do not satisfy the needs of highly compensated individuals and/or key employees.
The highest level of retirement planning for business owners is to establish a Restricted Property Trust. A Restricted Property Trust is not a qualified plan or deferred compensation. It allows business owners to make a fully-deductible contribution from their business entity, while recognizing thirty percent of the contribution on their individual tax return.
Business owners can choose who participates in the plan. In some cases, the business owner may choose to be the only participant, in other cases the business owner may choose to include key employees.
In order to establish a Restricted Property Trust the business cannot be a sole proprietorship. A Restricted Property Trust is not for everyone. Business owners interested in establishing a Restricted Property Trust must be able to fund a minimum contribution of $50,000 per year for 5-years or more. The primary benefit of a Restricted Property Trust is participants will typically earn at least 8-percent or more when compared to alternate investments using a very low-risk whole life insurance policy.
A Restricted Property Trust should be considered when business owners are looking for additional ways to reduce income taxes and accumulate additional supplemental retirement income. In some cases, it may make sense to consider including highly compensated and key employees.
There are a number of strategies available for business owners to secure retirement savings. Choosing the right strategy is more of a function of the business and its employees. While some strategies work best for the benefit of employees, other strategies may be more beneficial for the business owners.
What’s important to remember, is relying on the sale of your business to provide sufficient liquidity for a comfortable retirement is usually not enough.