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Small Business Retirement
The Scenario
Let's say you're a business owner who is earning $160,000 a year and is in a hypothetical flat 36% tax bracket. That means you would be paying $57,000 each year in taxes.
Wouldn't you rather put some of those tax dollars to work directly for you?
Potential Gain
Suppose, instead, you contribute $30,000, (the maximum allocation an individual may receive in an year in a defined contribution plan,) each year to a qualified plan and for the sake of this example assume you have no employees.
The tax deductible $30,000 contribution would result in current annual tax savings of $10,800 (36% of $30,000). Over 25 years this puts the $270,000 ($10,800 x 25) you would have otherwise paid in taxes to work for you.
Assuming an 8% return on the $10,800 invested each year in your qualified plan, these dollars would grow to $852,708 in 25 years. At withdrawal taxes must be paid. However, even if you are still in the 36% tax bracket, your distribution after taxes would be $545,733. And this is only what accumulated from your tax savings.
The other $19,200 you contributed is also working for you. Add that to the tax savings you invested and you could end up with a distribution after taxes of $1,515,924.
Note: Withdrawals made prior to age 59 1/2 may result in a 10% penalty tax.
Conclusions
As illustrated by the above example, the importance of a tax qualified retirement plan cannot be overstated. In addition to tax savings, a good retirement plan will also prove invaluable in attracting and keeping quality employees.
Click on the links below for a brief description of some of the various types of retirement plans available to the small business.
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