As a business owner, you lack some of the traditional retirement options that are provided by employers. The good news is that you can still secure your financial future and lower your tax liability along the way.
At Real Wealth Solutions, we specialize in helping business owners find the best retirement plan alternatives for future financial freedom. Here are the top choices we recommend:
1. Executive Bonus Plans
This is one of our favorite retirement plan alternatives, and we frequently set them up for owners of S and C corporations. With this option, a business can use tax-deductible company funds to provide bonuses to executives. These funds can later be used as a retirement income supplement.
Here’s how it works: your company awards a bonus to an executive (you), which is taxable as income for the recipient. But for the business, this bonus is tax-deductible. Then, the bonus is used to purchase a life insurance policy. When you retire, you can make withdrawals against the policy’s cash value as retirement income. The best part? All withdrawals are tax-free.
Not only is this an attractive retirement plan alternative for business owners, but it’s a great way of motivating and rewarding your key employees. This is especially true when compared to deferred compensation plans, which carry a risk of default in the event the company goes under.
Defaulting is not an issue with executive bonus plans because the individual employee actually owns the insurance policy. Better yet, the employee can choose beneficiaries who will receive their death benefits from the policy.
If you’re interested in this alternative retirement plan for yourself, schedule an appointment today. We specialize in setting up executive bonus plans for business owners.
- Major tax benefits. You can take advantage of tax-free growth and tax-free distributions.
- The money is not exposed. For instance, the money cannot be taken away if you get sued.
- The money is not subject to market risk, and the tax-deferred growth can be used for any purpose, not just retirement.
- You can access the cash value at any time.
- If you designate a beneficiary, they will receive valuable tax-free benefits upon your death.
- There is no cap for contributions.
- Depending on how the plan is structured, the cost of your insurance may be raised.
2. SEP IRA
SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. This is a popular choice for sole proprietors because it has minimal administrative requirements, and it’s relatively easy to set up.
With this option, you can contribute a decent sum to your retirement account each year. The exact figures may change, but for 2020, you can contribute 25% of your income or up to $57,000 (whichever is less).
This allows you to save much more aggressively than a traditional IRA, which caps yearly contributions to $6,000. A SEP IRA can also reduce your tax liability. You only pay taxes when you withdraw the money, and all contributions are tax-deductible.
There is one important thing to know about SEP IRAs: they are entirely employer-funded. In other words, if you eventually hire employees, you must contribute the same amount to them as you do for yourself.
- It allows you to save aggressively.
- All contributions are tax-deductible.
- Easy to set up.
- You can’t access the money until you’re 59 and a half. Otherwise, you’ll incur penalties.
- While you can save aggressively, there are still contribution limits.
- The money is subject to market risk and funds are exposed.
3. Individual 401(k)
Also known as a solo 401(k), an individual 401(k) is a popular option for self-employed business owners who don’t have employees. Contributions can be made through your business via your salary or made directly from business profits. Together, these contributions are capped at $57,000 per year.
In terms of tax advantages, you have some flexibility. This all depends on whether you have a traditional solo 401(k) or a Roth solo 401(k). With a traditional solo 401(k), contributions are made from pre-tax dollars, which reduces your taxable income for that year. Distributions are then taxed as income. With a Roth solo 401(k), your contributions are made with after-tax dollars, so your distributions are tax-free.
- Distributions during retirement are not taxed with a Roth solo 401(k).
- With a traditional solo 401(k), all contributions will reduce your taxable income for the year.
- Has a fairly high cap for contributions.
- Similar to a SEP IRA, you can’t access the money until you’re 59 and a half.
- Contributions are still capped, even though the limit is relatively high.
- The money is subject to market risk, and funds are exposed, just like a SEP IRA.
Related: Executive Bonus Plans: 12 Smarter Ways to Fund Your Retirement and Lower Your Tax Liability at the Same Time
Find the Best Retirement Plan Alternatives for Business Owners
As you can see, executive bonus plans provide you with the most generous amount of control, the most significant tax advantages, and many other benefits you don’t want to miss.
At Real Wealth Solutions, we specialize in setting up executive bonus plans for business owners. We’ll help you structure a retirement plan that suits your goals and lifestyle, and gives you the flexibility to control your money as much as possible.
Schedule a call today to get started.