For most business owners the path to economic independence rests pretty much solely in the worth of the businesses that they operate on a daily basis.
However, when factoring in all the potential swings that can drastically alter the value of one’s business, it can be a little challenging to realize that point of financial independence without a solid alternative plan in place.
Over the years, we have witnessed business clients who have formulated and adopted employee benefit plans that reward key employees, including the owners, for their hard work, devotion to the company’s success and tenacity. These plans offer a degree of financial security for their future retirement years.
We’re not talking about achieving that financial security in 25 or so years, but rather in a 12 to 15 year period. This can be done with a consistent commitment to the goal of financial security.
Specifically, what we’re recommending is the establishment of a defined benefit/contribution pension plan, for those companies with 2+ employees or more, not including ownership. Because of the nature of how these plans work, typically, the fewer employees the better the plan results.
The tax savings are so significant, that in most cases, the annual contributions are actually being subsidized by the Federal and State tax agencies, to the tune of 30-45%, depending on the type of business entity that’s reporting the income (ie: LLC, C and S Corps, Sole Prop, etc.). Given the tax savings alone, the concept is a must for business owners to consider.
Beyond the initial tax savings, another benefit is that all the earnings generated by the assets within the scope of the plan(s) are tax free to the participants of the plan, until distribution begins to occur.
However, much like many things in business, there are “no free lunches”. The plans will most likely require mandatory contributions unless provisions are established that the contributions can be reduced or possibly deferred in the event that the net profit of the business is not sufficient for a planned contribution.
A key factor in the success of these plans is to have the right plan creator and administrator when setting up and managing the plan.
We have also found that the funding of these plans are easier to do when done in small increments. So instead of one annual contribution, consider monthly, weekly or even daily contributions which also takes full advantage of dollar cost averaging.
Let’s conclude this overview by sharing a few examples of how effective these plans are in accumulating wealth. Over the years, we’ve observed dozens and dozens of these plans be established and in almost all cases, the asset values of a given plan accumulate at least $250,000 in 2-3 years and $1,000,000 + in 5-7 years, not taking into account the immense tax savings.
To start a discussion about the benefits for your business that setting up one of these plans can create reach out to talk with us about creating a complimentary customized plan for you.
