The Best of Both Worlds
While most retirement plans are solely focused on saving for your future self, a Business Funding IRA can provide benefits both today and for the future. This approach allows you to tap into your retirement funds today to capitalize your own business -without taxes or penalties. You even get to take a salary from the business. The way in which the retirement plan is integrated into your business also provides several avenues for tax-sheltered, long-term wealth building. It really is the best of both worlds.
A Salary for Today
Your retirement-funded business operates like any other business in many respects. It will provide the product or service for which it is designed, perform marketing as needed, potentially hire employees, and pay taxes. While you may wear many hats in the business, one that you must wear in order for the whole concept to work is that of employee. You must be a compensated employee of the corporation in order to be eligible to participate in the company retirement plan. As an employee, you must take a reasonable salary commensurate with your services to the company.
If you have family actively participating in the business, they can also be compensated employees.
In addition to salary, you may also be able to take some of your compensation in the form of shareholder dividends. In many cases, your business will be capitalized with both personal funds and retirement funds. If personal funds are used, then you are a shareholder of the business and would receive your fair share of any dividends issued. These earnings will still be taxed, but not subject to the payroll taxes such as Social Security and Medicare that apply to W-2 wage compensation.
Reduce Taxes with New Plan Contributions
One of the great things about the Business Funding IRA program is the presence of a generous retirement plan sponsored by your operating corporation. The initial focus of that plan is to be able to receive a rollover of funds from prior retirement savings in order to capitalize the business. The benefit of the plan does not stop there, however.
As you create income from your business, you can choose to set aside some of that income as new contributions to the retirement plan. In doing so, you will reduce your income and tax burden for the year, while adding to your tax-sheltered retirement savings.
Plan contribution limits can be as high as $55,000 for someone under age 50 and $61,000 for those age 50 and older. If you and your spouse are both active in the business, there it the potential to set aside up to $122,000 per year on a tax-deferred basis.
If the business is profitable in a given year, you can elect to issue dividends to the shareholders. Well, your retirement plan is one of those shareholders. Any dividends issued to the plan-held shares will be tax-deferred into the plan, just as if you received dividends from an investment in a public company. This is where your retirement plan gets a return on investment.
Want to Learn More?
If you have an interest in using retirement funds to capitalize your own business, please feel free to Contact Us. We’ve been helping entrepreneurs self-fund their business ventures since 2005 and have a wealth of experience we are willing to share with you as you pursue your dreams.