Category: Tax Free Income

You Don’t Need a Business Degree from Wharton to Build an Incredibly Successful Business,  

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Executive Benefits, Funding your Buy and Sell, Income from your business, Inside Sale, Key People_Or Group, Passive Ownership, retirement, Selling Your Business, Strategies of growing business, Tax Efficient, Tax Free Income, Value drivers, Working On Your Business

But you do need this…

Dear Fellow Entrepreneur, who wishes to grow their business and enjoy what they are building… 

did you ever wonder why some business owners run a successful business while others claw up a mountain to stay in business? It comes down to one STRATEGY, in my opinion.  

A Recent Survey Reveals That 86% of Small Business Owners Risk Bankruptcy or A Forced Exit by Missing This Strategy! 

Only 14% Of Business Owners Will Enjoy the Value of Their Business! i 

You and I are entrepreneurs, wired with passion to run our businesses.  I want to share with you a powerful strategy that will change how you run and grow your business. It will give you more clarity and create more simplicity in your life.  This powerful strategy is one of the major contributing factors to building value in your business.  

Have you ever noticed how some business owners keep more of the money they earn, work less, have unlimited family time, avoid getting drained by taxes, keep the best employees, and run their businesses, not the other way around? 

My clients tell me the strategy has given them clarity and has simplified their lives allowing them to enjoy more of what life offers! 

THE ISSUE and THE PROBLEM:   The mindset when you start or buy a business is to bring your product or service to market quickly to create cash flow. This is the “action planning”, and it’s all about cash flow. The problem is you stay focused on the ACTION PLANNING MODE and neglect the DETAIL PLANNING MODE altogether, creating financial chaos, and diminishing the chances of accomplishing your dreams and aspirations! 

Enter the Business Growth, Wealth, and Transition Plan (GWT PLAN) which focuses on the details of the Growth, Protection, Equity creation and Transition of your business.   The GWT PLAN is a “Designed Plan” and creates the future financial success of your business. The GWT PLAN is like Kryptonite, fighting off bad mistakes, lost opportunities and keeping you on the path of building your business’ future wealth! 

A TRUE STORY:  In 1971 my father died suddenly at age 51. His very profitable business in Hamden, CT, was sold for pennies on the dollar. My mother went from middle class to poverty level overnight. She was forced to sell the family home and move to a few different neighborhoods, giving up what she loved the most, which was cooking for the neighborhood kids.  This created great emotional turmoil in the family. 

THIS DID NOT HAVE HAPPEN, BUT IT DID.  Why?  Because my father had a “Default Plan”, NOT a “Designed Plan”.  He winged it, like so many business owners do.  Because of that, he lost his “Life’s Effort”, and his legacy, at an extreme cost to his family.  

If You Had a Financial Leak in Your Business That Was Going to Burst Your Financial Pipes, When Would You Want to Know About It?   

YOUR SCENARIO WITHOUT A GWT PLAN 

If you died or became disabled today, what will happen to your business?  Without a plan, the banker would call your credit line, the vendors would stop selling to you, your key people would be looking for new jobs along with other employees. Your family would need to get permission from the probate court to run the business without breaking the law.  

If your Key Person told you they were leaving along with five other employees, what would you do about this?  The banker will call the loan, your vendors will cease to give you credit, you may lose other employees, and you would lose income very quickly! 

What if you were in a squeeze economically, business was bad, costs were high, gross revenue is not covering expenses, what do you do? Call in Mr. Banker, and hope he has confidence in your business to solve the problem (remember Covid) and hope for credit! 

 You had enough; you want out. What’s the value of your business you want to sell?  86% of your fellow entrepreneurs are not going to sell their business, what would make you any different?  

The Same Scenario HOWEVER, You Implement Your GWT Plan! 

#1: Your banker doesn’t call your equity-line and they are satisfied with your continuation plan.  Your family has planned instructions on how to run the business, while your employees are satisfied and confident of the continued success of your business.  

 #2. Your key people stay on because you have incentives for them to stay. Also, you have protection documents that would thwart their ability to compete with your business if they left.    

#3. If you were so unlucky to hit a bad economic turndown, you have a special benefit in place to fund your cash flow without having to beg for money from the bank.  This was created through your business cash flow in advance.  It is substantial in value, and tax-effective, creating personal wealth outside of your business.  

#4. You have been systematically formulating plans over the years for the purpose of transition someday.  Because of that planning, purchasers are interested in buying your business at the highest potential value.   

If You Are Investing Money, Time, Pride, Sweat and Nerves in Your “Biggest Effort in Life” 

Why Would You Not Spend the Time to Protect It From the “What IF’S By Implementing Your GWT Plan! 

It’s Not Your Fault However! It’s the Planning Professionals Fault! 

Here is the difference between planners  and what we do and why we make a difference… 

It’s their agenda, not yours. –  

The GWT PLAN agenda is designed by you. You pick the subjects you wish to plan for. 

No respect for your brevity-take too long to plan. 

The GWT Plan uses educational tools such as short videos, so you learn on your own time and verification of what you learn via conference calls. 

They charge too much and complicate the planning making it more complex than necessary. 

 The GWT Plan charges are a fraction of the market charges for planning and is designed to be communicative and simple.  We use a patented plan called, “The One Page Solution”, which describes the issue and the solution on one page, and this is done, one issue at a time.  

They are averse to working with your other advisors. 

The GWT plan encourages your other planning team to join us, so we have all the information about your dreams and aspirations and what your team has been doing for you. We welcome all professionals to engage in your best interests.  

Many planners have never run a business or walked in your shoes. 

We have been in business for over 50 years and have never been in any other business professionally, and know what it is all about having staff, payroll, working with banks and having an array of tasks to deal with.  

They don’t spend time learning about your business and your value system, and don’t listen well. 

The GWT plan doesn’t start planning until we feel we understand what your dreams and aspirations are. By using our tools, we not only learn about what the facts are, we learn about how you feel about what you are trying to accomplish.  

Despite this…To Survive and Thrive in the Future Economy YOU NEED A GWT PLAN TO… 

Create a path to follow for success with clarity and simplicity for your business and personal life to help you enjoy your life.  

Create a business culture to help hire the right employees, develop middle management for your future transition, and free up more time for you. 

Uncover opportunities in creating wealth in your business with tax efficiency through your cash flow while protecting and growing your financial future. 

 Develop a solid transition plan to maximize the value of your business for your future financial security while creating wealth outside your business! 

Learn the secrets of developing your GWT Business Plan by requesting my FREE E-BOOK. I am offering a limited amount of copies for distribution over the next fee days! Take control of your future and go down the path the will give you CLARITY AND SIMPLICITY ALONG WITH GREAT SUCCESS!

REQUEST YOUR FREE COPY of my published book, “Unlocking Your Business DNA”, and learn the benefits of having a GWT PLAN!     ORDER NOW- distributing a limited number of E-Books.  

Click Here to get your Free DOWNLOAD E-BOOK

The Benefits Of Keeping Your Key Person And Key Group!

by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, evaluations, Executive Benefits, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, Strategies of growing business, Tax Free Income

 

Recently, I wrote an article about the “Quintessential Employee” and covered all the benefits of having a key person in your company. 

The Education of the Quintessential Employee! 

Some of the attributes of the key person are:  

  • Creates more business value by freeing owners to focus on other profitable tasks 
  • Purchasers of a business want to have middle management in place 
  • Builds reputation and culture 
  • Key people tend to impress other employees as a good example 
  • Key people, as described, are also likely future purchasers of the business, or 
  • Likely to run the business while the owner enjoys life, but still has the control and wealth 

For the full article, download The Benefits Of Keeping Your Key Person And Key Group

Enjoy the download of the full article. The link in the article will download immediately the option of receiving the report.

Download The Article

“The Story of Retirement for The Business Owner” 

Featured by YOUR BUSINESS WORTH, posted in Company Wealth, Executive Benefits, Income from your business, Life Insurance Types, retirement, Strategies of growing business, Tax Efficient, Tax Free Income

It is quite common for an employer to think in terms of a qualified retirement program when they think of retirement.  The benefits of having a company plan would be tax-deductibility, tax deferred, an employee benefit to help attract employees, and a host of other reasons to have one.  Most companies should have a long-term retirement plan for their employees. Most accountants will normally jump on this idea because it is another tax deduction.  

However, what is rarely discussed are the benefits that the owner of the company receives from the qualified retirement plan!   In most cases, the qualified retirement Plan will not be the best choice for the owner of the company, for various reasons.   

Here are a few disadvantages for the high-income business owner:  

  1. No control of deposit amounts  
  1. Limited contributions 
  1. Government controlled IRS FILING 
  1. Administration costs- actuarial costs, filing, accounting 
  1. Employer is the fiduciary is having responsibility and accountability to the plan (what happens when the employee loses money in the market?) 
  1. After-tax cost and non-recovery of the net outlay for the company 
  1. The percentage of payout for the employer is usually a much smaller percentage compared to the employees when they retire, so the employer owner is being discriminated against  
  1. The withdrawal is 100% taxable on all the funds 
  1. Tax exposure and penalty for using the funds before 59 ½.      
  1. Forced distribution RMD 
  • For the employee, having a 401k and/or profit-sharing plan is a great deal.  They could have matched contribution’s ability also.  It is probably one of the best ways for people to save for their retirement.   
  • The business owner or highly paid executive has the problem of creating enough capital for retirement so it can produce enough income to narrow the gap between their final pay and retirement needs.  In most cases, because of the limits imposed on qualified plans and the taxability of the withdrawals, the qualified plan will not be the answer.   
  • High Earning Business Owners – it’s a different story! 
  • However, for the high earning employer, this is not a great deal compared to other executive compensation plans the employer could be. implemented for them.  There are several major pension destroyers for the employer when comparing retirement plans vs executive compensation plans.  
  • Disadvantages of a qualified retirement plan to the “high earning business owner”, compared to using a CEEP! 

  • Limited contribution amount 
  • 100% of withdrawal taxable at retirement – With a CEEP you control the contribution amount 
  • Pre 59 1/2 with penalty.  
  • Funds in a qualified contribution plan would be very hard to extract (hardship clauses) 
  • Bottom line, when the employer needs funds to build inventory, buy equipment, payroll, retirement funds are not a source, however, in a private executive compensation plan, they would be.  
  • With a CEEP you have access to funds without a penalty 
  • Death benefit; limited to accumulated fund, and taxable in a pension.  
  • With an executive compensation plan like the CEEP, the death benefits are tax-free and large 
  • CEEP would have a large tax-free death benefit to finish the retirement that wasn’t even started, and the benefit would be tax-free 
  • Deductible:   
  • Contribution plans are tax deductible as the contributions are made, consequently showing a charge to earnings in the year of contribution.   
  • CEEPs are balance sheet friendly as a receivable asset with interest.  
  • CEEPs can be cost recoverable for the company, while retirement contributions are not. The qualified pension contributions are normally tax-deductible when made, but not recoverable for the company.  
  • With a qualified plan, you are forced to take RMD (Required minimum distributions) 
  • With CEEP, you are not.  CEEPS distributions are tax-free. 

Table below: A qualified contributory plan doesn’t do the job when the owner of a company has an interest in growing wealth through their business.  As mentioned, the contribution must be shared with the other employees, and there are rules as to the maximum contribution which high earners can make.  In this case, the owner only could put the $30,000 in their account. With the CEEP Executive Compensation plan, the full $50,000 could be deposited into the account of the owner of the company! 

Plan Contribution Future Value 66 Gross 15 payout Taxes YRLY Net Income 
Qualified 30,000 893,351 80,348 24,104 56,244 
CEEP 50,000 1,863,708 165,099 0 165,099 

Many advisors including accountants, lawyers, and financial professionals are not aware of some of the great programs that can be designed using executive compensation.  The CEEP program (Corporate Executive Equity Plan) is a flexible design built around the tax code.   

Here is a chart comparing a Profit-Sharing Plan/401k and a specially designed CEEP Executive Compensation Plan.  

ITEM PROFIT SHARING 401K CEEP 
Tax deductible Yes Yes, optional 
Tax deferred growth Yes Yes 
Government Controlled Yes No 
Selective as to Participants No Yes 
Pre 59 1/2 availability  No Yes 
Tax Free withdrawal No Yes 
Death Benefit Only current accumulated value of account, taxable Immediate substantial tax-free benefit 
Required Minimum Distribution Yes  No 

Bottom line:   

Contributory plans like 401k’s, SEPS, simple plans and IRA are wonderful plans for employees to save money for their retirement.  However, given the above list of restrictions for employers, they are not effective for high income business owners in my opinion.   

Note:   I used 30% marginal bracket. Over a 15-year payout, the pension would have a $361,560 tax liability, while the CEEP was tax free.

To learn more about The Small Business Super Retirement Plan Just for Business Owners and High Earning Executives, request our free White Paper. CLICK HERE! 

The Costly KNEE JERK FINANCIAL SUGGESTION!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Life Insurance Types, Passive Ownership, Tax Efficient, Tax Free Income, Uncategorized

Over the years, I have been asked by business owners how they can use their company to create more tax deductions and to build retirement funds for themselves. When you put tax deductions and retirement funds in the same sentence, it suggests the vanilla response, of a pension plan of some type or a contributory retirement plan, like a profit-sharing plan, or a 401k. 

However, is that what a business owner is really asking? Or, do they mean, they would like to build retirement funds through the business and assume they can get tax deductions? Or do both elements co-exist in the plan that they are thinking of? I think most advisors would suggest a 401k plan, a cash balance plan, a simple plan, or a profit-sharing plan for example. 

 This is what I call the costly, KNEE JERK REACTION. When asked by a business owner, about retirement plans, I have learned to slow it down and ask the business owner to clarify exactly what they are trying to accomplish, rather than rattle off a KNEE JERK response, such as a “profit sharing plan, or 401k plan”. 

Questions like:  

–      Do you want to include everyone in the plan? 

–      Do you only want to favor yourself and family? 

–      Are you trying to give a benefit to a specific employee?

Do you want all the contributions to end up in your account, or are you willing to share with other employees? If so, how many and who?

If the employer/employee is trying to stockpile contributions to their account, they will have limitations with money purchase plans (limitations on contributions for 2022 of $58,000.) This makes it hard to deposit substantial amounts of money into the employer’s individual account, since they must include everyone. 

Based on the response, this will determine how I design the plan. If he wants to spread the dollar among the group, you are talking about a qualified retirement plan. On the other hand, if they want limitations as to who can be involved, they are speaking about a non-qualified executive compensation plan. 

In this model, I compared two scenarios so my client would have an idea of the difference in absolute dollars. I based the model on conservative values and returns, staying consistent with both types of plans. I am comparing a CEEP to a Hypothetical Pension plan (money purchase plan). [i]

As you can see in the chart below, based on the same parameters for each plan, the CEEP program created much more retirement benefits for the owner than a qualified retirement plan. 

The owner participant received a much higher payout (tax-free), than the pension plan. In addition, if the owner died, from day one, the CEEP plan would pay a substantial tax-free amount to the family, while the qualified plan would only pay what was in the account which would be taxable to the beneficiary. The CEEP death benefit would be 100% tax free and would not be required to be withdrawn at death, or older ages like a pension or IRA plan would. 

Once you compare a CEEP to the Pension plan, you can then see why defining exactly what the owner wants to accomplish is important as both plans offer different benefits and different tax scenarios. 

KNEE JERK advice happens more than you think! And when it does, it can cost your client a lot of money, NOT to mention your reputation as an advisor. 

In this case, the “Knee Jerk” suggestion to use a pension plan to solve the problem, shortchanged the business owner from having greater benefits for the future when compared to the suggested pension plan. 

[i] In this scenario, the owner could only put in $30,000 of contribution out of the $50,000.  Based on a five many company and different salary ranges. 

REQUEST our free Business Essentials Report.  This report is more than a report, it is a resource and guide to many planning ideas for business owners.  It is an immediate download CLICK TO RECEIVE. 

You As A Business Owner Have the Best Bank In Town!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Executive Benefits, Income from your business, Life Insurance Types, retirement, Tax Efficient, Tax Free Income

WHO WANTS TO BUILD MORE WEALTH THROUGH THEIR BUSINESS?  

Did you know as a small business owner, have access to the best possible loan arrangements to create future wealth. This little know secret in the tax code, which has been used by large companies and savvy financial professionals for decades, allows you to use your company cash flow to create tax-free wealth, at a nominal tax cost.   

Take 10 minutes to see how $55,000 creates $1,875,000 of tax-free wealth.  

Wealth Without Taxes Report: Click For Your Report

How The Buy-Sell Agreement Fits Within the Scope of An S Corporation!  

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Income from your business, Inside Sale, Life Insurance Types, Selling Your Business, Tax Efficient, Tax Free Income, Valuation, Working On Your Business

Part 1 

BY Thomas J. Perrone, CLU, CIC 

Normally, a business makes up a substantial portion of the owners’ net worth. Many business owners do not think about what will happen to their business in the event of their death or a life changing event (trigger).  

This article will focus on why a buy and sell is an important document, one of the most important you will need. 

We will also discuss the buy and sell agreement in the context of an S Corporation since S Corporations are extremely popular. 1 

Consequences of not creating a buy-sell Plan.  

  • Stress on the business’ cash flow or credit line having to purchase the decedents owner’s interest  
  • Unqualified and instability with employees running the company 
  • Disagreements and conflict among heirs increasing administration time and costs 
  • Lack of a market for business which may potentially represent a significant value in the estate 
  • Suppressed value much below fair market value to raise cash for estate needs 
  • Termination of the business 
  • Instability amount employees and creditors 
  • Lack of liquidity to pay estate taxes and other administration costs 
  • Stream of income to remaining family members from the business is lost 
  • Valuation disagreements and IRS litigation 
  • Nightmares of not having a Buy and Sell agreement in a S Corporation! Loss of eligibility as a S Corporation resulting in involuntary termination of the S. Corporation status 
  • Most transfers to entities such as partnership, Corporation and most trusts are prohibited transfers 
  • A termination of S Corporation status will cause the Corporation to be taxed as a C Corporation as of the day of termination creating income tax consequences to the shareholders.  
  • Corporation, which is terminated, must wait five years before making a new S Corporation election, resulting in Corporation being taxed on its net profits for five years.  
  • The surviving shareholder could face additional tax burdens on future ongoing Corporation distribution and on those made upon the sale of the Corporation 

Funding the buy and sell agreement is always a challenge to companies, because it comes down to four ways of funding a triggering event 

  1. Borrowing money from the bank 
  1. Using cash flow out of the business 
  1. Life insurance death benefit 
  1. Cash  

When you compare the costs of funding the buy and sell agreement, life insurance will be the least expensive by a long shot, in most cases, especially, based on a death trigger.  

Other triggers, like divorce, sudden removal from the firm, voluntary and non-voluntary removal from the firm, bankruptcy, and disability are triggers where there is not a death benefit being paid, but money is needed. In these cases, a promissory note may be used in conjunction with a term payout, or installment loan payout.  

However, the cash buildup of a life insurance policy could be used as a funding vehicle especially if the policy has been in force for many years.  

In Part 2 we will investigate how the buy and sell agreement fits within the scope of an S Corporation.  

FREE REPORT “Jones Business Planning and Succession Report” ASK FOR REPORT R3 

CLICK HERE 

Creating Great Personal Wealth With Your Business Income!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Life Insurance Types, Strategies of growing business, Tax Free Income, Working On Your Business

In my planning with many companies over the years, I realize that many business owners are not using the corporate cash flow to create wealth outside of the business. Normally they are using their after-tax dollars to buy financial products to create a benefit for them personally.

Many of the business owners feel they need to put all their current dollars into the business. This is a mistake! The reason this is a mistake is the business equity can get tied up just like a home-equity can. At a time when the business owner needs his business equity the most, is usually at a time when he cannot get it out for one reason or another. Business equity is not very liquid as it is tied up in receivables, loans, inventory, and the like. By putting too much of the business owner’s wealth in the business, they are risking the loss of it in the future, or the very least, the ability for its use for some major cost.

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Owning a business creates opportunities to use the corporate dollars to create personal wealth outside the business. I call these benefits executive compensation. Normally you can arrange executive compensation programs to be highly effective and efficient tax wise. The corporate dollar can do more for you than the owner could do on their own personal dollar. We have many programs where the corporation is taking a deduction and creating wealth for the owner and their family which is positioned outside of the business.

Below is a project we worked on which shows the value of the corporate cash flow. The names of been changed to protect the innocent, but the case history explains how effective using your corporation cash flow to create wealth outside of your company!

The Case Of Joey Bag Of Donuts

This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business.  You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came that he needed to exit his business.  He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement_, and taking the wealth with you when you need it the most, can be a problem, if you do not have the right exit strategy. _

There are many reasons wealth gets lost in a business when it is sold.  It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible.  Therefore, he purchased his company building and put it in a separate LLC.  Joey Bag of Donuts also believes in putting as much of his income into the company pension plan. Again, this plan is outside of the business.

We also taught him to have his company support whatever it can legally towards his personal lifestyle.  For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through the company.

Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but did not want to use his own funds, so why not have the company support more retirement contributions?

He already had a profit-sharing plan, and he was sharing company contributions with his employees.

We decided that a non-regulated plan was the best way to go, so we developed a plan for only him.  The plan is a combination of two concepts.  We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).

The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.

THE PLAN: As you can see, the company made all the contributions, and took the deductions for them.  Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement.  He also could turn the cash into a tax-free income stream.  In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000.  Along with that he has a death benefit of $2,300,000 payable to his family tax-free.

THE BOTTOM LINE: Joey Bag of Donuts gets retirement income using corporate funds.  All the contributions can be applied to just his account.  He also has the use of the account before retirement, like a “family bank,” along with the ability to withdraw funds tax-free.[1]  There would be no 10% penalty if withdrawn before 59 ½.

THE RESTRICTED PLAN: The “Restricted Plan” relates to an employee of the company that the owner wants to make a “A key person To Hold onto Forever.”  This is a terrific way of giving someone a benefit with a vesting schedule, so they stay longer.

Summary: If you own a company and are not taking advantage of the CEEP program, you are missing one of the genuinely great executive benefits available to you as a business owner.  The plan is flexible so you can design it to your needs.

OVERVIEW OF THE PLAN (Summary):[i]  Type of Model: CEEP

EMPLOYER

Yearly Premium Payment:  $25,000

Yearly Net Cost:  $17,500

Total Gross Premium to Retirement: $675,000

Total Net. Premiums to Retirement: $472,500

Total Loans:

For Tax Costs: $202,500

For Interest Costs:  $112,003

Net Cost of Loans: $314,503

If Loan Forgiven, Net cost:  $220,152

EMPLOYEE

Annual Average Interests: $4,148.25

Loan Payoff AT Retirement:[2]  $314,503

Net Cost:  0 (all funding came from Ajax Company)

AT RETIREMENT:

Rollout Amount:  $94,350.83

Tax Cost on Forgiveness of loan[3]:  $94,350.83

Net Cost to Mr. Joey Bag Of Donuts

ll :  0 cost out of pocket[ii]

Cash Value in policy after rollout/forgiveness:  $793,4 29

Death Benefit After Rollout: $2,306,317

Tax-Free Retirement Yearly Income: $67,500

Equivalent Pretax Payout Before Taxes:   $96,429

Years of Retirement Income:18

Total Retirement Income:  $1,215,000

All and all, not a bad arrangement.

[1] Fund in excess of the collateralized amount.

[2] Funds are withdrawn from policy tax-free, results are “0” cost to Mr. Joey Bag Of Donuts

[3] Fund come from policy tax-free.

[i]This is only a summary of the illustration attached to this book.  The illustration is a hypothetical model of how the policy would work.

[ii] This is a fully funded Employer plan. There is “0” cost out of pocket for Mr. Joey Bag Of Donuts

For a free repot on creating Wealth Without Taxes, CLICK HERE! REQUEST R2 REPORT
This report will discuss the methods which will allow your business to use its cash flow to create wealth for you outside your business at the most tax effective way of creating wealth. Executive Compensation CEEP planning is more tax effective than a 401k, 403b, or any other pension and retirement plan. 

As a business owner you have the opportunity to create an amazing amount of wealth with little tax cost. Start with the report and find out how you can create your wealth and your financial security for the future. 

Tax Effective Strategies For RETIREMENT PHASE 2

Featured by YOUR BUSINESS WORTH, posted in Company Wealth, Estate Planning, Income from your business, retirement, Tax Efficient, Tax Free Income

In the Phase one report I discussed why only focusing on the accumulation stage of retirement could be a big mistake.  I emphasized the need for tax diversification in retirement to create the largest after-tax spendable dollar to help maintain your lifestyle when you retire.   

I have seen where people have allocated  their investments in categories relating to the type of tax structure the investment has, and then positioning the category to a timing of when to start taking the withdrawals from the category.  Here are the categories:  

Type of Category Contributions Type of Growth Distribution 
Equities After Tax Tax Deferred Growth Taxable 
Taxable Income After Tax Taxable Growth Taxable 
Tax Free Income After Tax Tax Deferred Tax Free 
Tax Qualified Pre Tax Tax Deferred Fully Taxable 

One method of distribution would be to defer the withdrawal from accounts that are tax deferrable, to grow the value for as long as possible.  As you can see in the chart above, most of the accounts are tax deferred.  However equities, if they are individual stock, may be tax deferred when outside a 401k or IRA, only to be taxed when they are sold.  They may have taxable dividends yearly which would be taxable.  Equities could also be personally purchased mutual funds which are taxable, and in many cases are not the type of account where you can control the timing of the tax exposure.   

One strategy would be to use the taxable income plans first to give the other plans the opportunity to grow through tax-deferment.   Or, we have seen where clients pull out their taxable income from the investments and supplement the balance with tax-free income plans from life insurance or the Roth IRA.   

Other Distribution Methods 

One might consider taking the taxable income category first since the income is taxable.  The 2nd category may be the qualified plan money since that is 100% taxable. The 3rd category may be the equities which are taxed less than then category 1, 2, and are taxed on a capital gain basis. The last category would be tax-free because, the assets can grow tax-deferred over a longer period, and then give off a tax-free income, normally when more income is needed (purchase power and time), and all income would be tax-free.   

Sometimes you need to withdraw income from two or more categories for reasons.  For example, let’s say you are now receiving social security, but you are also receiving taxable income from your mutual funds, but you don’t want to create more taxable income which may disqualify you from some potential benefit.  Or by receiving more taxable income, your social security tax liability will jump from 50% to 85%.   

A consideration under that situation would be to withdraw tax-free income to support the needed income without causing an increase in taxes.  Another need may be to qualify for housing benefits like freezing property assessments.  Tax-free income may be the only way to qualify. 

Qualified plans such as 401k, 403b and IRAs, are the most heavily taxed.     Most people deposit their retirement savings into company plans since they are readily available through their employer.  Very rarely are employees educated as to the tax exposure of the account when they retire, and many are surprised at the taxes they have to pay on the withdrawals.  

In my planning, I use quadrants, I call my system, the “Asset Cycle Portfolio” and make the qualified retirement plan and IRAs the main generator of income.   

I suggest to our clients that they  defer the tax- free income plans, but I do let our clients know that the plans are a great place to grab money for the  support of their larger purchases such as cars, second homes, and other items.   

By using the tax-free life insurance plans, or Roth plans, they avoid paying tax today, and can defer the other accounts.  I like the idea of the “family bank”, using the life insurance, as you can withdraw the money tax-free, and then replace the funds.  I find this a great vehicle with great flexibility for life’s changes.   

It is not uncommon for our clients to finance their new cars using tax-free cash value and pay the loan back at an assumed low rate which they set.  By repaying the loan just like they would if it were a bank, they create the ability to reloan in the future the same money.   

For example, I have a client who purchased their high-end vehicle at the end of the lease by loaning his consulting firm the money to buy out the car.  His firm now has to pay him back over five years at 3%.  He will make about $3,000 in interest earnings, plus his company can take the tax-deduction on the interest of the loan paid to him. 

The big picture 

It’s more important to invest in different categories of assets to have the ability to develop a tax wise strategy when you retire, as opposed to a one demension investment strategy.  By doing so, you can take advantage of tax laws, eliminate unnecessary taxes, and create family banks with effective tax leveraging.   

For more informtion on how to use Tax-Free Life Insurance, request my FREE WHITE PAPER, “Wealth Without Taxes”  

Planning For Retirement Using Investment And Income Tax Strategies (Part 1)

Featured by YOUR BUSINESS WORTH, posted in Income from your business, retirement, Tax Free Income

Planning for retirement and accumulating money for that future event is important for many people.  Their concern is to make sure they have enough capital to turn into cash and use as an income payment.  Another consideration is to make sure they don’t outlive their income, as their retirement could last longer than their working career.  

Many retirees will require a substantial amount of capital to provide the income needed to maintain their retirement lifestyle.   Most of the capital is focused on retirement programs, such as 401k/403b, IRAs, and other company sponsored plans.  

The focus is on saving and investing during the accumulation stage, picking investments that compliment what they think will create the capital needed at their target retirement date.  Because of this mindset I find that many people are putting their assets in one investment basket strategy.   By only thinking about an accumulation strategy, they are missing the mark on “net spendable income”, the true driver of their standard of living. They also need to also consider tax diversification strategy in order to accomplish the desired result.  

When people “cash out” at retirement for income, they are surprised to hear their qualified company plan is taxed at 100% of every dollar withdrawn, and that they are forced to take the money (through Required Minimum Distribution). They received a tax deduction on their contribution, which is a very small part of the total retirement pie.  Taxes are the single most expensive part of your retirement, and the component that is planed for the least. 

When consulting with our clients, we suggest they plan the two strategies in conjunction with each other.

  1. The accumulation of assets through investment or “The What”. Such as funds or accounts they wish to invest in.   
  2. The tax ramification of the investments– this is the “The Where”.  Such as IRA, 401, ANNUITY, LIFE INSURANCE – OR THE TAX RAMIFICATION, and the tax effects of each of them. 

There are two risks, investment risk, and tax risk which will erode your retirement nest egg.  

As you plan your retirement and investment you should think about the following: :

a. Diversification of the investments, this is called asset allocation. The purpose of this is to avoid as much risk as possible, while attempting to gain a consistent rate of return. 

b. Income tax diversification:  this is the “where” you have your funds and how will they be taxed when they are turned into cash. 

Taxes are unavoidable and income tax rates change. The assumption is they will be higher than now because Uncle Sam is always looking for more revenue, and normally the higher income earners foot the bill. 

With some of the products of today, you can minimize taxes, and in situations eliminate them altogether. 

When people invest in high taxable investments they have  no options when they distribute the funds to provide an income, they end up paying much more in taxes than if they had a strategy. 

 Part of our strategy is to have our clients recognize the consequences of putting all their assets in “one basket” for income purposes. They need the knowledge of how an investment can be “tax wise”, allowing them to blend their strategies for a lower net tax result.  

An example:  Sam grows his 401k to $600,000.  He can take income from the 401k of $44,149 a year for 20 years, assuming 4% ROI. The tax rate is 33% (state and Federal) as he has a pension and rental income, and his wife has a payout.  By having all of his assets in a taxable account, he will pay $14,569, for a net of $29,579. 

However, if he did some planning, he could have deposited money in a more efficient tax account where the payout would be tax free.  Let us say Sam invested enough money to provide $29,579 in his 401K AND he put the extra in his specially designed 7702 life insurance policy which gave him $14,569 tax free income.  Sam would only pay the taxes on the $29,579 or $9761, $4807 less in taxes.

Observation: 

Because most of the money was in a qualified plan (401k), Sam didn’t have the option of creating tax-free income. He could have converted some of the money to a Roth, however, he would have had a tax liability.  

Tax-strategy planning: is most important to retirees who will have to replace their income in the future. Diversification of retirement assets gives the retiree the option of deciding when the best time to sell, exchange, liquidate or annuitize asset classes.  

Reasons why income tax diversification is important

  1. Retirement can last a long time- in some cases longer than you have worked
  2. Limited working ability 
  3. Investments fluctuate in value
  4. The law changes over time- consequently so do tax rates

Income taxes have the greatest impact on your income, so it’s not as important as to the value of the asset as much as the tax structure of the payout of the asset.  

A cash rich life insurance policy may not grow as great as a mutual fund given the same amount of contribution over time.  However, when income is taken from the policy, it is tax-free.  The mutual fund withdrawal is taxed in some form, either partially, or 100%, depending on the where it was invested (IRA or personal holdings). Consequently, you don’t need as much value in the life insurance to give more tax-free income then the after-tax income from the investment.  

There are five ways to purchase retirement funds

  1. Personally
  2. Roth IRA Individually or through 401k Roth
  3. IRA – tax deduction
  4. Investment in a sub-account inside a variable annuity
  5. Life insurance variable, indexed or permanent

Some types of investment can be tax differently depending on where you purchased them. Life insurance and Roth accounts can create tax-free withdrawals.  

An IRA is 100% taxed upon withdrawal, the same as a qualified pension plan, 401k, 403b. 

Personal investments are partially tax-free(basis), while the other parts of the investment can be ordinary taxes, or capital gain. 

There are also Tax Elements to consider.  

  • Tax deductible contributions: like IRA, 401K/403B
  • Deferment of taxation such as qualified plans, IRA, Roth’s, life insurance, annuities
  • Non-Tax deductible, deferred taxation, and tax-free payouts, like life insurance and Roth IRAS

So it is important to understand “where” you are putting your retirement money, when considering investment and tax strategies. 

Phase 2.  Will discuss the retirement strategy of payout…. 

Request your FREE SPECIAL WHITE PAPER CALLED; Wealth Without Taxes,

Submit the form and we will send you the informative white paper explaining how to set up a tax-free income using your business, with little tax exposure. This is a plan for business owners!  

Pension Maximization Using Life Insurance To Provide The Guaranteed Capital!

by YOUR BUSINESS WORTH, posted in Executive Benefits, Income from your business, Key People_Or Group, Life Insurance Types, Tax Efficient, Tax Free Income

For people who are in pension plans, (yes there are some in the private section, but mostly in the government sectors), they face a decision at retirement  of how to take the retirement income distribution. 

Basically,  they have two options.  They can take a lifetime income, which is the highest income the annuitant can receive over their lifetimes.  Or, they can take some variation of a survivorship  benefit for their spouse.  The 50% joint payout is the normal payout, however, some plans will allow 75% and 100%.  The higher the percentage spousal benefit, the lower the annuitant payout.     

Example:  

This example uses the joint and survivor 50% payout. 

Let us assume if the annuitant takes the single life payout, the payout would be $2,100 per month.  If the annuitant took the survivorship options, the payout would be $1,600.  There is a $500 difference per month.  Should the spouse die first, usually, the surviving annuitant is stuck with the $1,600 for their life.  

On the other hand, if the annuitant took the life income of $2,100 and dies first, the spouse receives nothing.  

Options: 

A great guarantee options, is to purchase  a life insurance  plan in the amount which will represent the present value of the survivorship value would be. 

By purchasing a $285,000 life insurance policy, using an assumption of 3% earnings on the investment, the payout would be guaranteed for 20 years.  If the annuitant wanted the $1,600 a month for a 25 year period, the present value is $334,332.  

Scenario: 

If the annuitant dies first, the pension would end, however, the life insurance would be paid tax free.  The surviving spouse could invested  the proceeds and take withdrawals from the account  equal to what the spouse would have received under the joint and survivor pension payout.  The spouse could take more or less, as needed. 

If the spouse predeceased the annuitant the  life insurance can be cashed out, or continue to stay in force to create a legacy for the family.  The policy also can also be used to supplement a retirement income for the annuitant using the cash value. 

Unlike the pensions joint and survivor option, the Pension Maximization Plan offers much more flexibility in the planning.  It also allows for maximum payout should the annuitant live a long life while providing security for the spouse. 

“Special Free Report”; If you are interested in a tax-free retirement sponsored by your company, get this special report called; Wealth Without Taxes.  This is a plan designed for business owners and key executives, not the rank and file.  Besides tax free benefits, the program offers business owners the ability to shift business income to their personal ledger with minimum tax exposure. To get this report, CLICK FOR YOUR REPORT   Once you fill out your email information, you will receive the report.  Thank you. 

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