As a small business owner planning for their retirement exit, you may be focused on tasks like increasing your retirement income or stabilizing the business. But have you considered the tax issues involved in your exit? Income taxes can easily take a big bite out of a retiring owner's income if not planned out correctly.
To help you, consider these five key ways to minimize retirement tax issues and maximize your preparedness.
1. Choose the Right Savings Plan
While most workers know that they should boost retirement savings as they approach retirement, they may not make good use of the right types of accounts. Small business owners have many choices in both tax-deferred retirement accounts, such as the Simplified Employee Pension, as well as non-tax-advantaged plans like Roth IRAs. The right mix depends on your income and retirement plans.
2. Determine Your Needs
Each owner should have an idea of what income they need to earn during retirement. While it may seem counter-intuitive, your goal may not be to simply get the biggest payout possible. Remember, the more money you take out, the higher your taxes are likely to be. If the buyout would significantly exceed your needs, you might be better off to continue to invest in the business or to put money into tax-advantaged retirement funds.
3. Develop a Tax-Friendly Exit
The tax implications of getting a buyout from your business, from partners, or from a buyer could put a strain on your finances. If you receive your entire payout in one lump sum, you'll end up with massive amounts of income that could be eaten away by a big tax bracket increase. If you receive that same buyout in increments, though, you can better control how much is subject to taxes.
4. Form a Post-Retirement Income Plan
What do you intend to do with your time once you formally retire? For some, retirement is an end to their working days and a start to a life of leisure. However, others want to continue in a small capacity or do consulting. However, the amount and types of post-retirement income you earn determines your tax bill. So you'll need to decide what those sources of income will be and how to balance them.
5. Work With Professionals
Gather a team of professionals to help you plan your transition. This should include an attorney, an accountant, and a tax planner. Together, this team will work to create a good exit contract, a solid financial plan, and the lowest taxes possible.
No matter how close or far away your retirement goals are, you should begin the planning process as soon as possible. It may take years to work out the best route. Start by forming your planning team of professionals today.
To learn more, contact a company that offers tax planning services.