Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
There are many ways for a small business owner to fund retirement. Although according to US News in a survey done in 2018, 34% of all small business owners had saved nothing for retirement. That’s not good. And interestingly, 42% of small business owners, according to The Motley Fool, June 2018, are counting on the sale of their business to constitute a major source of retirement income. That’s seems like a pretty big bet to me. Who is going to buy those businesses again?
So what might a small business owner do with respect to planning for retirement? In most pass-through tax entities – S-Corps, Partnerships, and LLCs – the most viable, tax advantaged way to plan for retirement is through a qualified retirement plan. The amount that can be contributed to a defined contribution plan is dependent, in large part, on the owners earned income, but can be as high, for 2019, as $56,000 or 25% of wages, whichever is less.
In working with smaller companies, I often see an owner trying to maximize the contribution at $56,000. Simple math says that $56,000 is 25% of $224,000. In other words, if an owner pays himself anything more than $224,000 in wages, he is not getting any benefit as far as his defined contribution plan is concerned. He would be better off taking amounts above $224,000 as passive income, if that is an option, and paying taxes at a lower rate.
However, if there is a spouse gainfully employed, or a spouse that could be so employed, there could be an argument that we should pay the spouse some of the income that might have otherwise gone to the owner above $224,000. Why would we do this? Those additional wages going to the spouse are now earnings that can be considered for our 25% limitation. We can’t give our owner any more contribution, but if we pay the spouse $100,000, for example, we could make a contribution of up to $25,000 into her account
As you might expect, there are many considerations that must be factored in before we rush to take the action noted above. The additional payroll taxes for the spouse might be steep. But then again, getting a benefit from Social Security might be good. Who knows? The additional $25,000 deduction good, right? Lots to consider. Make sure you work with someone qualified and experienced to walk you through the pros and cons around these scenarios.
In fact, work with me.
We all pay into it. We are all expecting to receive it. But do we all understand it? Apparently not. New research from Nationwide Retirement Institute suggests that many Americans have either false expectations as to what they can expect from Social Security or a false reality of their own retirement.
The research has so much data that I can’t possibly cover it all in this blog, but here are just a couple of the more glaring misconceptions: 70% of pre-retirees (those within 10 years of retirement) believe they will be eligible for full benefits at age 63. Wrong. And 26% believe that even if they do claim benefits early, that the benefits will rise once they reach full retirement age. Wrong.
In fact, there are so many things about Social Security that pre-retirees get wrong, it almost makes you wonder what they get right. They certainly don’t get the amount right. The vast majority believe they will receive $1,805 per month in Social Security benefits, when the actual number is closer to $1,408 per month. That a difference of 28%. That’s a BIG difference. Many people, for some reason, forget that Medicare is not actually free and that premiums are withheld, on a monthly basis, from the Social Security benefit. And it can be a meaningful amount.
Is there some hope? Of course. It appears from the research that only 22% of pre-retirees have a formal written retirement plan, but that if you work with an advisor the likelihood of increasing your Social Security benefits goes up. In fact, 76% of those surveyed say that if their advisor did not, or does not, speak to them about maximizing Social Security benefits, they will switch advisors.
So what should you do? Make sure you have a good advisor who works with you to put a solid plan together for your retirement. Are you looking for such an advisor? Give me a call!