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Retirement Planning: Qualified Retirement Plans for Business Owners

It’s no secret that business owners constantly search for different ways to reduce their tax obligations legally, especially when it comes to retirement planning. So why is it that so many successful business owners fail to take advantage of the government-sanctioned methods embedded in the tax code? Qualified Retirement Plans provide business owners with a legal way to reduce their annual tax obligations while also saving money to ensure they can fund the lifestyle they desire in retirement.

Although it sounds surprising, the government supports tax avoidance by intentionally creating ways to reduce your tax obligations legally. The government has social goals and offers incentives, written into the tax code, to those who participate in helping to achieve those goals. 

As the population continues to grow and the average lifespan continues to increase, the social goal of people having enough money saved to fund the rest of their lives once they are no longer working is becoming even more critical. Thus, the government uses Qualified Retirement Plans to motivate and incentivize people to save for retirement long before it becomes a concern.

WHAT IS A QUALIFIED RETIREMENT PLAN?

If you are a business owner, you have probably spent most of your adult life dedicated to your business. In some cases, that means saving for retirement took a back seat to the priority of building a successful business. Qualified Retirement Plans provide business owners with a legal way to reduce their annual tax obligations while also saving money to ensure they can fund the lifestyle they desire in retirement.

Qualified Retirement Plans typically allow you to contribute pre-tax dollars to an account intended to fund your retirement, helping you reduce your current taxable income by the contribution amount. The account grows tax-deferred and isn’t taxed until you withdraw funds from it when you more than likely move into a lower tax bracket during retirement years. For your retirement planning needs, reducing your current taxable income by the contribution amount while you are in a higher tax bracket and transferring it to a time later in your life when you may be in a lower tax bracket can be an attractive strategy for successful business owners.

When it comes to retirement planning for business owners, there are two different types of Qualified Retirement Plans: Defined Contribution Plans and Defined Benefit Plans.

DEFINED CONTRIBUTION PLANS

Most business owners preparing for retirement planning are familiar with Defined Contribution Plans—retirement saving vehicles that allow you to contribute a specified percentage or fixed amount of every paycheck to the plan. With this type of retirement plan, there are limits on how much the participant can contribute each year. Though there are limits, a Defined Contribution is more flexible of the Qualified Retirement Plan because you are not required to contribute every year.

For that reason, Defined Contribution Plans are generally more favorable to younger business owners who have a longer time horizon until retirement or for business owners with unpredictable cash flows. The retirement benefit is determined by the contributions made to the account and its investment performance over time; therefore, the expected benefit at retirement is uncertain.

Types of Defined Contribution Plans include 401(k) Plans, Profit Sharing Plans, and SEP-IRA Plans.

DEFINED BENEFIT PLANS

A Defined Benefit Plan can add significant value in maximizing personal wealth for the right business owner’s retirement planning. Defined Benefit Plans are retirement-saving vehicles that allow you to target a specified benefit amount to receive at retirement. The contribution amount is calculated and adjusted annually to ensure you reach the specified benefit amount upon retirement. There are no set maximum annual contribution limits. Therefore, a Defined Benefit Plan allows for significantly higher annual contributions—making the potential tax benefits for business owners considerably more significant than those of a Defined Contribution Plan. With that said, contributions to a Defined Benefit Plan are not discretionary.  You are required to make the calculated annual contributions to fund the plan adequately.

For those reasons, Defined Benefit Plans could be most beneficial to successful business owners nearing retirement and generating substantial cash flow consistently —making it an excellent option if you want or need to build up sufficient retirement assets quickly. Additionally, the contributions are tax-deductible, making Defined Contribution Plans an excellent tax reduction strategy during the contribution years.

Qualified Retirement Plans are written into the tax code, by the government, as a legal way to reduce your tax obligations to incentivize people to save for retirement.

Have you started saving for retirement?

If you’re a business owner and answered no, the benefits of setting up a Qualified Retirement Plan alone give you a great reason to start.

If you’re a business owner and answered yes, are you sure the type of retirement plan you have in place is the most effective solution for maximizing your wealth?

Whether you’re just starting or revising a Qualified Retirement Plan, many factors come into play when vetting out which type could be most effective for you and your business. Factors include your age, business cash flow, number of employees, entity structure, compensation, and retirement expectations. While most business owners could benefit from having a Qualified Retirement Plan in place, an ideal plan will help you more than others. Elite wealth managers that specialize in understanding the needs of business owners can help you navigate the complex landscape of Qualified Retirement Plans.

DISCLOSURE & ACKNOWLEDGEMENT

The information included in this material is for informational purposes only and should not be relied upon for any financial or legal purposes. Arlington Capital Management Inc, dba Arlington Wealth Management (AWM) is an investment adviser registered with the U.S. Securities and Exchange Commission.  Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training, nor are we selling you any product.  Rather, we are seeking to provide you with advisory services.   Please consult with your own tax and legal advisers before investing. AWM cannot and does not guarantee the performance of any investment.  Past performance is no guarantee of future results.

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