Retirement Tax Planning

The powers of the retirement plan transcend tax planning, giving their owners super-enhanced investment options and shielding them from bankruptcy. If you plan on becoming wealthy, and you shouldn’t be reading this if you don’t, then you absolutely must tap into the power of retirement tax planning to help propel you to your ideal lifestyle.

Tax Protection

A dollar saved by avoiding taxes is even better than a dollar earned, mostly because you would have had to pay on that dollar earned, anyway! Plus, it always brings a smile to my face when I am able to keep a few of my hard earned bucks out of Uncle Sam’s greedy grasp.
The advantages of investing through a tax deferred plan aren’t just spiritual, however, and they go beyond the immediate tax deferment of income.

• Opens up different kinds of investments that might not make sense if they were not tax advantaged. For example, while your assets are inside their tax protected shell all earnings and capital gains on them have no immediate tax effect; which is not the case for investments held outside a retirement plan. Therefore I can invest in assets without having a tax bite every time I buy or sell. If you’re interested in trading or even if you’re only rebalancing your portfolio, which you ought to do anyway, there will be no tax to pay as long as you keep those assets inside the plan. My wife and I have assets both inside and outside our retirement plans and our money outside is for more long-term investments while we like to look for deals and growth with our money inside the plans.
• Allows faster accrual of income. Look, you don’t have to have a MBA in finance to understand that if you have to pay taxes on gains every time you sell an investment or receive a dividend then your money will grow more slowly than if you were able to do the same transaction tax free. This is the unappreciated benefit of a retirement plan contribution as people fixate on the immediate tax savings instead of the long term savings.

Bankruptcy Protection

Owning your own business is risky business. You get sued, the economy tanks and takes your business with it, your supplier steals your designs or your partner goes bankrupt and leaves you with a big bill. One day your on top of the world and the next day you’re on the breadline and its happened to many smart entrepreneurs with much more experience than yourself; Donald Trump, Henry Ford, and George Foreman have taken the walk of shame only to come back bigger and badder than ever. Most retirement plans, done right and not abused, can shelter assets from bankruptcy and provide a nice, soft cushion to fall upon before building your next business.

Diversification

There is stereotype of the entrepreneur as a hyper-testosteroned type A guy that bets everything on his business, including the family farm and his first born. As you learn the ropes, you quickly find out that this is absolute nonsense. Obviously, many successful entrepreneurs are female and virtually 100% of entrepreneurs that have been in the game for any amount of time carefully diversify their money across various business and investment opportunities.
Every entrepreneur that I have had the honor to work with and learn from has had a passion for their business and laser intense focus on making it successful. It is because of the focus and attention to detail that they should be stuffing every dime that they are able to or are allowed to into a retirement plan. Most retirement plans can be set up to be very low maintenance. Just make the maximum contribution allowable into one or more index funds and forget about it. This is what makes it so special to the entrepreneur, no sweat, no hassle, no losing focus on their most important investment, their business. Keep the current economic crisis in your mind and remember that businesses really can be floating in a sea of cash one day and then high and dry the next.

You Are Not Immortal

When your mother gave birth to you she simultaneously condemned you to your death. We will all die and most of us will grow old or become ill before we finally kick the bucket. When you’re a new entrepreneur everything is exciting and the sky is the limit and you don’t really think about that, but it’s there, hovering over everything that you do. The fact is that your enthusiasm for business and entrepreneurship will fade and you will tire and wish to devote time to other pursuits, whether its spending more time with your family or traveling the world or running away with the circus. An industrious and fortunate few of us will cash out Paul Allen style and the chicken feed that we have saved through our retirement plan will almost be an afterthought, a little gas money for the yacht. Savor that thought for a moment. Now, 95% of entrepreneurs I know, and I’m including people with successful, multi-million dollar businesses, use their retirement plans to at least supplement their incomes when they choose to slow the pace down a little (few actually totally retire). Also, should you lose the longevity lottery and slip into the deep sleep prematurely, then those retirement funds could help sustain the loved ones that you leave behind.

If you don’t max out your retirement plan contribution, or at least give until it bleeds, 2010 is the time to really make this a priority. Even if you are in the start-up stage and cash is hard to come by you need to “pay yourself first” and not neglect this important tax and finance tool.