Slash Your Tax Bill: Easy Tips for High-Earning Small Business Owners Nearing Retirement
High earning business owners have managed to do what most Americans haven’t: they’ve not only taken the leap to enter the high-risk, high-reward arena of self-employment, they’ve also beaten the statistics on failure rates (on Startup failure, according to SBA: expect 20% in year 1, 30% by year 2, 50% by year 5 and 70% after year 10).
To those few and proud Americans who have bucked failure trends:
Your company is a success, you’re making a ton of money, and your quarterly tax bills are one of your biggest headaches (congrats!). You’ve entertained discussions with outside investors, but you want to grow organically and not give up the equity, control or culture you’ve grown.
Now how about some relief on those tax bills? Relocate the company headquarters abroad? Sounds exotic, but that strategy’s days are numbered thanks to a possible new Global Minimum Corporate tax.
So Ireland and Panama are a no go. Okay. You’ve still got options. There aren’t too many roadblocks between no-retirement-plan and maxing out a 401(K), which if you’re over 50, is $30,000 in 2023 + 25% of your W2 compensation.
If that amount doesn’t do it for you, bear with me…
You can sock away even more pre-tax income by adding a Cash Balance plan to your 401(k). This plan is used frequently by high earning owners who are typically older than their employees. Why? Because the IRS allows for greater contributions to be “skewed” toward older plan participants.
Often (depending on income levels) the owner can contribute upwards of hundreds of thousands of dollars to a Cash Balance plan, which not only serves to defer this money into your tax qualified retirement account – which has its own benefits like protecting assets from creditors and flexibility with loans – but it also allows for a potentially significant tax deduction as contributions are generally tax deductible as “ordinary and necessary business expenses pursuant to IRC Section 162.
What you’re left with:
Taxable income that’s significantly reduced, and those quarterly estimated payments now seem more digestible. On top of this, you may even qualify for an additional 20% deduction if, after the large contribution to your retirement accounts your Modified Adjusted Gross Income falls below $364,200 (Married Filing Jointly) or $182,100 (Married Filing Single). If it doesn’t, again, congrats.
The Cash Balance Pension Plan may be your best move right now toward a more secure financial future.
It's time to take action, boost your retirement savings, and minimize your tax burdens.