Loan Out Retirement Plans
“There are two things that are infinite: femininity and means to take advantage of it.” - LA FEMME NIKITA
written and directed by Luc Besson
(3.5-minute read)
If you have your own Loan Out company (A.K.A. S-Corp, A.K.A. Incorporated yourself), you may already be enjoying some of the benefits. But are you taking advantage of one of the biggest game-changers?
I’m referring to Retirement Plans. I generally don’t like to talk about retirement to screenwriters and directors, but this is more about building wealth. Through your company, you can set up one of these plans and begin funding it immediately. You will enjoy tax-deferred, or tax-free, growth along with compound interest, or as Albert Einstein once called it, “the eighth wonder of the world.”
SEP IRA
The SEP part of this means “Simplified Employee Pension.” This is something the IRS nailed. It’s very simple. There’s a form that must be completed, but it’s only a half-page and takes about one minute. What’s more, you don’t even have to file it with the IRS or any other organization.
You can make contributions of 25% of your compensation up-to a maximum of $69,000 (2024). This amount is also tax deductible to your company. It’s a business write-off!
Here’s an example: your Loan Out company pays you a salary of $150,000. If you’d like to make a tax-deductible contribution to your IRA, you probably can’t; you make too much money. By the way, even if you could, the maximum you can contribute is $7,000 (under 50-yrs-old). But with your SEP IRA, you can make a tax-deductible contribution of $37,500 to your IRA.
Unlike many other plans, you’re not required to make SEP contributions for the year. You can skip it. If you have other employees in your S-Corp, and they meet certain requirements, you must contribute to their SEP IRAs in an equal percentage amount as yourself. You can’t give yourself advantages and ignore your employees.
SIMPLE IRA
A SIMPLE IRA is also fairly simple to set up (duh!). That form is about 2-3 pages and requires some decision-making upfront. Like a SEP IRA, this does not involve a filing with the IRS or other institutions.
There are stricter limitations to SIMPLE IRAs. Let’s take the same $150,000 example. You would only be allowed to contribute $20,500 to your SIMPLE IRA instead of the $37,500. That’s a big difference when you add that up over time and consider compounding interest. Also, you must contribute to this plan every year.
There is also a SIMPLE 401(k) which combines some of these rules and limitations with the 401(k) below.
SOLO 401(k)
You’ve probably heard of a 401(k). You can establish one with your company even if you’re the only employee. Yes, the “Solo” part of this means a one-participant 401(k) plan. The IRS considers a married couple as one participant, by the way.
There is more work to do with a 401(k) than the other two options. You may want to go through a third-party for assistance, for a fee of course. Annual filings with the IRS along with administrative paperwork is required.
The maximum amount you can contribute is the same as a SEP IRA, which is currently $69,000. However, if you want to contribute as much as possible during those years when you make less than $300k, then a Solo 401(k) will usually come out ahead. You can see the comparison by using THIS CALCULATOR.
Another benefit of a 401(k) over the IRAs is the ability to take out a loan. You’re able to borrow money from your account and not be hit with taxes and penalties if done correctly. This could be more convenient than going through a bank.
TAKE ADVANTAGE
There are rules to be aware of, but you have options. These aren’t the only ones, either. Take advantage of having your own company by using it to build wealth. If the IRS says it’s okay, maybe it’s time to look into it.
If you’d like more information about building wealth, you can schedule a complimentary meeting HERE.
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