The “experts” are telling you to stuff money into your retirement plan as much as possible. If you’re a business owner looking to sell in the next 3-10 years, this advice may be awful. Here’s why…
TCJA Expiring: The trump tax cuts will expire at the end of 2025. This means that, in all likelihood, your taxes as a business owner are going to go up, maybe significantly. So it doesn't automatically mean that you should be stuffing as much tax deductible money into your retirement plan right now as possible. You might consider the Roth side of your plan, but you would be wise to look down the road at future tax rates.
Liquidity Event(s) Coming Up: If you're going to sell a business in the near future for any significant sum, this liquidity event will be accompanied by a tax bill. Depending on how you structure your sale, you might get a second bite of the apple, which means another tax year of higher rates.
Access to Cash: If you are under age 65 and still working at your company, it is very difficult and often expensive to get money out of your retirement plan early. The government intentionally makes it so. So before tying up a bunch of cash in the retirement plan, make sure you have an idea about future cash and investment needs.
You Might Fail to Adequately Fund Life Insurance: One of the advantages of a permanent life insurance policy, a tool often used for buy-sell agreements, is that when structured and used correctly, distributions are generally tax-free. Of course the main advantage of such a policy is that if you screw up and die before you sell your business, the same event that brought about a bunch of financial problems, also triggers the solution to those problems.
Social Security is Going Broke: At first glance, this might seem like a reason that you should fund your retirement plan, and do so aggressively. But if Social Security continues to be insolvent, one of the only solutions left at that point maybe to raise taxes. So again, we think it is prudent for business owners to look for ways to get cash out of the tax game now and forever.
Growth Sucks Cash: In March of 2020, most investors were selling. Many of our clients were buying. Why were they able to? They had cash. So did the firm that bought one of our clients’ companies. As Verne Harnish says in his book Scaling Up, “growth sucks cash”. You have to have the cash around to be able to acquire competitors when they are on sale and to reinvest in your own business when the opportunities for growth are in your favor.
Check In at Home: Some of the things you want do with your wealth may be better funded by another vehicle than your corporate retirement plan. Education for kids or grandkids, investing in your neice’s new business, buying the old family farm, the list is nearly endless. Make sure that we’re you’re putting your money where your goals are.
As a company, we oversee more than 250 retirement plans. So we're definitely not saying that funding your retirement plan is always bad. And there are plenty of times when getting the tax deduction now is better. What we want to guard against is the assumption that this is always the best and only place to put cash.
It's not.
Any opinions are those of Timothy Weddle and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.
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