Why Open A Retirement Plan for Your Business?
October 17, 2013
Let’s start by discussing some of the benefits of setting up and maintaining a Retirement Plan for your business. The first benefit is that contributions you make into the retirement plan are generally tax deductible, and then those contributions grow tax deferred. Remember, contributing to a retirement plan is one of the best tax shelters available to people during their working years.
Here are a few questions we routinely get:
- Why bother contributing to a retirement plan at all?
- And why contribute now, especially since the stock market, until recently, hasn’t performed all that well during the past decade or so?
When you contribute to a retirement plan, the taxes you save provide you with an Immediate Return on your Investment. Let’s assume you’re in the 28% federal tax rate, and you live in a state with a 5% rate. So each additional dollar of income you earn is taxed at 33%.
In this scenario, you would earn an instant 49.25% return on your investment by contributing to a retirement plan. That’s because it only costs you $670 in after-tax dollars for every $1,000 that is now invested. You’ve already earned a whopping $330 on the $670 you invested.
Yes, you will owe income taxes on the money withdrawn from these accounts down the road, but you get to invest the government’s money over all those years that the money remains within your retirement accounts. And, you get to keep the investment earnings on the government’s money. Trust us, investing the tax savings over time really adds up. The compounded growth on the tax savings can easily add up to tens of thousands of dollars or more.
For example, $100k invested and earning an average of 8% per year over 25 years will grow to be worth $685k within a tax-deferred account. What happens if you pay taxes each year at a 33% rate? Since your compounded return falls from 8% to 5.35%, this $100k investment will grow to just $370k over 25 years, assuming all the income and growth within the account is fully taxed each year. That’s how powerful tax-deferred compounding can be.
There are additional benefits of a retirement plan. For starters, money in most retirement plans is protected from your creditors. That’s great news for anyone in a profession like healthcare where getting sued is not completely out of the question. Please check with a lawyer to find out which types of retirement accounts are protected based on the rules for your state.
Plus, contributing to a retirement plan is one of the best ways to build a nest-egg to fund your post-working years. Unless you work for a government employer or some other business that provides a lucrative pension, it’s up to you to make sure you have enough money set aside to fully fund a comfortable retirement. And the earlier you start building our nest egg, the better chance you give yourself to reach your retirement savings goals.
Looking for additional benefits of maintaining a retirement plan for your practice? Offering a retirement plan might be a way to help you attract and retain staff, and is also a great way to reward staff for loyalty and longevity at your business. Most business owners would agree that having an engaged staff is a key ingredient to having a successful business.
If you’d like to learn more, check out this recorded PowerPoint presentation narrated by the Founder of The MDTAXES Network on Retirement Plan Basics for Healthcare Practice Owners. This presentation explains the benefits and costs of the most popular retirement plan options available including SEP IRA, SIMPLE IRAs, Keoghs, Profit Sharing Plans, Safe Harbor 401ks, and Cash Balance Defined Benefit Plans