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Why Most Small Business Owners Do Not Have Qualified Retirement

There’s a rapidly mounting belief that the goal of attaining financial security in retirement is going to fall squarely on the shoulders of the individual, as certain governmental programs may not be able to deliver as promised. Recent market events have created incredible challenges and unprecedented volatility to business and individuals.

Many business owners are not availing themselves of retirement plans and other ways to maximize their monies down the line. Very often there are substantial opportunities for implementing retirement solution if only the business owners are aware of them.

In a study of 513 business owners, only about two-fifths of them have a qualified retirement plan. These can be either defined contribution or defined benefit plans. Meanwhile, less than a sixth of them have a non-qualified retirement plan.

Among the companies with retirement plans, the monies tend not to be meaningful for the business owners. Only about 16 percent say these funds are “important.” A little more than half report the monies to be “somewhat important.” The remaining 28 percent say the monies are “not important.” This is usually a function of the business owners not having significant sums in their qualified retirement plans for any number of reasons such as the plan being “top heavy.”

According to Frank Seneco, president of the advanced planning boutique, Seneco & Associates and author of Maximizing Personal Wealth: An Advanced Planning Primer for Successful Business Owners, “Most business owners are not taking advantage of retirement solutions for a number of reasons including costs, a perceived lack of ability to benefit them directly, and uncertain business environment, and liability concerns. However, there are probably a number of potential qualified and non-qualified retirement solutions that would be highly beneficial to these business owners.”

At the same time, there are many opportunities for business owners to dramatically improve their company’s financial situation. Consider the following opportunities:

  • A small business created a business overseas a few years ago. As a result, $118 million of profits are trapped in a foreign jurisdiction. If the business repatriates the overseas profits into the U.S., it will pay significant tax in the U.S. on such amount. However, these profits can be brought back into the U.S. without current taxation while allowing for the continued growth of the business on a tax deferred basis.
  • A small business has a 401(k) plan that is providing low benefits for the principals, is complex to administer, requires annual reporting and filling requirements and has fiduciary risk for the principals. A strategy can be used that provides the principals better benefits, requires no reporting or filling requirements and has no fiduciary risk to the principals going forward while offering retirement benefits for workers.
  • A small business has a frozen pension plan that is overfunded by $17 million because of government funding requirements and stock market investment performance. The excess assets can be used to improved retirement benefits and be invested in the business going forward on a pre-tax basis. 

“Retirement solutions tend to address a number of needs and preferences of successful business owners. They are wealth enhancement strategies and can have additional benefits as estate planning and asset protection strategies,” says Seneco.

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This article first appeared on Forbes.com Written by: Russ Alan Prince on Oct 15, 2015

 

 

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