Retirement Benefits

April 13, 2006

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As tax-favored, wealth-building vehicles, retirement plans are hard to beat for providing tax deferred compensation for you and your employees. Contributions to a qualified plan are deductible to the business, but not taxed to the individual until distributed at retirement. And income earned on the plan assets accumulates on a tax-deferred basis as well. Hence, profits can be taken out of a corporation without being subject to tax at the corporate level. They are set aside for your later benefit and not taxed to you until you receive them at retirement, at which time most folks are in a lower tax bracket.

Many small business people think they can rely on the value of their business when they sell it at retirement and fail to see the importance of a retirement plan. This is a big mistake for two reasons. First, there is no guarantee your business will be worth anything, much less what you expect, when the time to hang up your spikes arrives. A willing and able buyer may not be waiting breathlessly on your doorstep. Secondly, it's almost foolish to pass up a tax-favored method of reaping the benefits of the time value of money. It doesn't take much to start adding up to sizable sums over a period of years. Uncle Sam encourages you to save for your retirement by leaving these deferrals in the tax laws. Perhaps it's his way of telling you not to rely on Social Security!

The value of money over time, through the "miracle of compounding," grows geometrically if the money is invested and the earnings (in the form of interest, profits, dividends, capital appreciation etc.) are reinvested rather than distributed out. Consider the following chart:

The growth of $1.00 at interest:

Years	6%	8%	10%	12%	14%
1	1.06	1.08	1.10	1.12	1.14
5	1.34	1.47	1.61	1.76	1.93
10	1.79	2.16	2.59	3.11	3.71
20	3.21	4.66	6.73	9.65	13.74

Pay yourself first every month, even if it's just a nominal amount. Salt it away in one of the tax-deferred vehicles mentioned below or even in a plain vanilla IRA and forget about it. It will grow and be fruitful and multiply surprisingly fast.

For more details about specific types of plans, see our discussion of retirement planning for business owners.