Which Is It? Pay Less Taxes, Spend More Time with the Love of Your Life or Both?

By Joseph A. Wiggins Jr., AIF®

Joseph A. Wiggins Jr., AIF®

Joseph A. Wiggins, Jr., AIF® Founder/Chairman

Someone said to me the other day, “Growing up has been really hard. I liked it when I was a kid!”  It was spoken during a discussion about all the responsibilities associated with owning and managing a business or professional practice. So why can’t it be easy? 

If only you had the time, you could meet every goal you set out to achieve this year, right? I know, 2018 began almost 10 months ago. Only two more months left in the year. There just doesn’t seem to be enough time to do it all.

True enough, but don’t panic. Some people say the “business new year” actually begins after Labor Day – somewhere near the beginning of the fourth quarter. It makes a lot of sense. After all, summer is over, vacations are largely behind, the kids are back in school, and service professionals and business owners of all kinds are licking their chops poised to reap the rewards of fourth quarter activity. With only months remaining in the year, everyone seems to have renewed focus. 

You don’t have to be a retailer to expect an uptick in business activity during the final quarter of the business year. More businesses of all types have a calendar fiscal year than any other fiscal period. If your business has a calendar fiscal year, you still have two months to achieve 2018 goals – plenty of time for major achievements. 

Which brings up the big question:  what exactly were your top four goals for this year? Would they include (1) generate more revenue, (2) generate more bottom-line profit, (3) spend more time with the love of your life, or (4) pay less taxes? With more than three-fourths of the year gone already, are you on target? And if you had to rank these goals in order, could it be possible you would rearrange them (1) pay less taxes, (2) spend more time with the love of your life, (3) generate more bottom-line profit, (4) generate more revenue? 

The priority of goals suggested above implies that paying less taxes rises to the top for most business owners and professionals. There’s good reason why:  it’s often said that the single greatest detriment to wealth-building, or saving enough money for retirement, is taxes. This is why almost everyone places a high priority on reducing taxes. 

So how can you pay less taxes, plus get to spend more time with the love of your life? Here’s a little history – and a roadmap to meeting those two goals in 2018 even though only a quarter of the business year remains.  

Retirement Plans:  A Secret Too Well-Kept

Most blogs focus on a single principal idea. This one is addressed to owners of businesses of all sizes and is really about both saving and deferring taxes. As you read below, you may think it’s about “retirement plans” or “employee benefits,” but it’s really about how easy it is to use retirement plan law to save taxes and accumulate wealth for business owners. The fact is retirement plan law represents one of the most beneficial tax saving/tax deferral opportunities anywhere in the law. 

Qualified retirement plans are tax-favored in many ways. Various plan designs offer long-term tax deferral via currently deductible contributions with tax-deferred earnings. Or, in the case of Roth plans, after-tax investments with earnings that are never taxed. In both instances, tax-saving leverage can be immense long term. 

As a means to create wealth or income for a dignified retirement, business owners who have already taken advantage of retirement plan law tax leverage agree that few alternatives offer better results. 

What is not widely known is that one single retirement plan (or a two-plan combo) can be designed to provide both (a) industry-competitive retirement benefits for employees, while (b) providing an entirely different level of tax-deductible savings for owners in order to reduce either personal taxes or taxable profits of the business. 

In high-profit years when personal income and business income are subject to top tax rates, and when positive cash flow is available, you can shave from the top of taxable income tens of thousands of dollars (or hundreds of thousands) and park those monies in a retirement account exclusively for the business owner.  All that is required to make this possible is offering a baseline industry average retirement plan for other company employees. 

From Rev. Rul. 81-202 to Today 

It all began back in 1981, just a few years after the passage of the Employee Retirement Income Security Act (ERISA), when the IRS issued a far-reaching, almost visionary Revenue Ruling (81-202) that spawned tens of millions of dollars in tax savings for professionals and independent business owners. It essentially permitted businesses (business owners and professionals like you) to contribute different amounts to the retirement plan accounts of different individuals on their payroll. That’s right, not everyone had to receive the same retirement plan dollar amount or the same percentage of pay each year. That Revenue Ruling was about three pages long! 

Since then, professionals and business owners have implemented or enhanced thousands of existing retirement plans, socking away tax-deductible retirement savings for business founders and owners while providing meaningful benefits for working employees.  A win-win for everyone! 

Fast forward to 2018. Over the past 36 years, those three pages of Revenue Ruling 81-202 have sprouted literally thousands, maybe tens of thousands of pages of regulations and commentary as offspring, most notably the Section 401(a)(4) nondiscrimination regulations. Today’s 401(k) profit sharing plan design techniques known as “cross-testing” or “new comparability” are both offspring of Revenue Ruling 81-202. Many will say that the hottest new plan type in existence today – the cash balance plan – is also an offspring of the 1982 ruling. 

The best news of all is that thousands of pages later, business owners today, with the help of experienced professionals, can still contribute to their own accounts and deduct annually tens of thousands of dollars (or as much as $100,000 or $200,000 if a cash balance plan is used) in IRS-approved retirement plan strategies without the obligation to fund the same percentage or dollar values across the board to all employees. Yet, survey after survey shows that most professionals and business owners are not aware of such opportunity. 

Employer Has Choice as to Who Benefits Most

It may seem to some that it’s unfair for business owners to contribute more to their retirement account than to others, but it isn’t. Just think of the way year-end bonuses are determined, or the disparity in salaries of owners/executives and other employees. Is that unfair? Not when the tax system takes a huge bite of hard-earned business profits out of the pockets of those who take the risks and work the longest hours in order to create the jobs for all the others.

So how can your awareness of this often overlooked tax-saving opportunity benefit you this year? If you already have an existing plan, it should be reviewed at least once annually. If you’re one who believes the business new year begins in the last quarter, then now is the perfect time for such a review.

Under current law, retirement plans can be modified to selectively contribute different amounts to the accounts of different employees, including business owners. Depending on the type of plan you now have, you may or may not have to wait until next year to realize the full potential of the tax savings discussed above. Still, if that is the case, certain changes must be made this year prior to December 31 in order to optimize next year’s tax benefits. 

Industry surveys indicate that most professionals and business owners are not fully aware of the options and flexibility extant in the complex laws and regulations governing tax-favored retirement plans. What matters is when they do learn that such options and flexibility exist, they act to do something about it. 

The “business new year” is the perfect time to act.  Failure to do so could result in an opportunity lost. It does take a little time to effect changes to take advantage of such options and flexibility, so don’t delay too long. 

So what about spending more time with the love of your life? Survey after survey confirms that the stress associated with money issues (including taxes), business headaches, inadequate savings, worry about retirement, and the other myriad issues competing for our attention can eat into quality time with those special in our lives. When these issues can be curtailed or eliminated, spending time with those special people in our lives can be more frequent and more rewarding. Saving taxes is a good place to start. 

Speak with an ERISA expert today!

— Topics: Tax Strategy