You read that correctly but, it’s more likely your retirement adviser is really a salesmen for a company that is trying to make money by investing your money. Good return or bad return, they get paid. But, for the small business owner, there are so many products out there to choose from, rare is the retirement account salesmen not in bed with one of the investment companies. Nonetheless, this post is for business owners who want to avoid paying taxes by saving for their future or want to save in alternative investments (gold, real estate, art, etc.). Avoidance by the IRS is fine. Evasion is not-so-fine. While, there is a little bit of a grey line as to what is avoidance and evasion, these plans are 100% legit and legal. The government wants you to save money and therefore has provided these generous tax benefits. So let’s start avoiding taxes:
- SEP-IRA. This is an IRA for the owner of a business. It will allow you to save up to $50,000 per year. Not to bad. At the highest rate of tax, that saves you $18,500.00 in tax. Most people do not pay 37% (as of 2018) so it most likely saves you about $12,500. This is the most basic model and should be used for anyone who is beginning a business and wants a safe, easy way to sock away money. But, contributions to the plan are limited to 25% of compensation. Therefore, you can only contribute 25% of your income. Thus, to max it out, you’d have to pay yourself $200,000 in payroll and you don’t want to pay yourself that much because you’re going to be paying large amounts of payroll taxes on your salary. So, perhaps there’s a better way.
- 401(k) + Profit Sharing Plan. This allows $18,500 of your compensation to go into the 401(k) plan and then 25% of your compensation, up to $250k, so another $62,500. This would give you the ability to put away $81,000. Better than the last plan and sometimes in an S Corporation you have to pay yourself a larger salary so that you are paying yourself a “reasonable” salary, and in that case this makes the most sense. But, see the next paragraph.