Why a Retirement Plan might be the best option for your business
It’s that time of year again. You’re closing the books on another profitable year in your successful business and it hits you. What’s the reward for all your hard work? You’re going to get hammered with taxes! It’s not a nice feeling. So, what’s a successful business owner like you to do? From what I hear, the most common advice you’re going to get from your CPA is either 1) buy some equipment or 2) start a retirement plan. While it’s very tempting to go out and buy that new (fill in the blank) that you’ve had your eye on, I would suggest you may want to give some serious consideration to option 2.
Why is that? Unless you really need that new (fill in the blank) to improve the future profitability of your business, this could be a great opportunity to invest in yourself and your business. From a personal financial planning perspective, unless that new equipment is really going to make an impact on future profits, buying more equipment that is going to depreciate is not going to help you like setting aside money for your future in a tax advantaged way.
When I start working with a business owner to figure out how they’re going to be able to retire, I frequently hear that all their money is “in the business”. My question then is how do you want to get the money out of your business? If we follow Stephen Covey’s advice to “begin with the end in mind”, I think this decision becomes easier. Before sinking money back in to your business, it’s a good idea to have a plan for how you’re going to get it out! It’s not impossible, but it can be tricky.
Therein lies the beauty of the retirement plan option. Not only does it have the potential to provide some nice tax benefits, but it gives you an opportunity to diversify your wealth. Instead of continuing to put all your profits back into the business, you have a way to start building a nest egg outside the business. That’s called not having all your eggs in one basket. From a risk management perspective, that’s a nice way to go!
Having said that, a retirement plan for your business isn’t just an investment in yourself. It’s also an investment in your business. With unemployment numbers reaching full employment, the pressure is going to be on for you to attract and retain the talent that helps your business succeed. Being able to help your team save for their retirement in a tax advantaged way may no longer be a nice to have. It may become a “have to have” if you want to keep and compete for the best people.
So why aren’t more business owners starting retirement plans instead of continuing to invest in their businesses? I think it’s because they’re just not as familiar with them as that new (fill in the blank). The reality is that there are lots of different options on how you can set them up. They can be confusing. There can be risks.
In future blogs I’ll go into more detail on the different plan design options so you can figure out which might make the most sense for you. In another blog, I’ll talk about how you need to approach it to manage the risks. In the meantime, if you are thinking about starting a retirement plan for your business, and have questions, let me know. I’m happy to help!
