How to Save and Invest Outside of Your Business

There's a statistic by the Exit Planning Institute that states more than 80% of a business owner's networth is locked in their business. Couple that with another statistic by EPI that states 80% of business owners who go to market, never sell and we have a huge problem.

Owner's have the majority of their financial wealth tied up in an asset that is highly illiquid. So what can you do about this?

Start diversifying where you put your dollars. Now I'm all for investing profit back into the business for growth but to help manage risk, in my experience investing in assets outside of the business has served many owners well.

What are Qualified Accounts?

These accounts include a 401k, Solo 401k, SEP IRA, Traditional IRA, Roth IRA, and Simple IRA just to name a few. They are considered qualified because you may qualify for certain tax benefits when you put money into one of the accounts.

The 401k, SEP IRA, and Simple IRA are examples of retirement plans you can set up for your business. There are rules that go with each depending on if you have employees or not, how much you want to contribute, etc. but these accounts allow you to contribute a good amount of money for the long term. Contributing to these accounts also have the potential to reduce your taxable income in that year. The money you put in can be invested in a variety of stocks, bonds, mutual funds, exchange traded funds, pre-built portfolios and continue to grow tax-free for the long term.

The Traditional IRA and Roth IRA are other types of accounts that you can open up in any bank or brokerage institution which will allow you to save and invest for the long term. Money grows tax-free and you have a lot of flexibilty as to how you want to invest.

What are the differences between a Traditional IRA and Roth IRA?

Traditional IRA

Money contributed may get you a tax deduction in the year contributed.
Money grows tax-free
Money is TAXED as income when you TAKE IT OUT
There is an additional 10% penalty on any amount taken out before age 59.5
There is a Required Minimum Distribution at age 73 and every year thereafter. Meaning when you turn 73 the IRS calculates an amount that you are REQUIRED to take out. This amount is also taxable.
If you fail to take out your Required Minimum Distribution in any year at or after age 73, there is a 50% penalty added to the amount.
Contributions are limited to $6,500 per year or $7,500 per year if over the age of 50 (2023 numbers).

Roth IRA

Money contributed into the Roth IRA does not provide any immediate tax benefit. In fact you PAY taxes on the amount contributed. BUT once you are over the age of 59.5 and have had the Roth IRA in existence for more than 5 years, any amount taken out of the Roth IRA is TAX FREE. This is a huge long term benefit.
There are NO Required Minimum Distributions. At age 73 and thereafter you are not required to take out any money by the IRS.
Money grows tax-free like the Traditional IRA.
Any amount you contribute into the Roth IRA can always be withdrawn Tax Free up to that amount. Meaning, if you contribute $20,000 into a Roth IRA over 3 years and it has grown to $30,000. You will be able to take out $20,000 tax-free and penalty free at any point in time.
Contributions are limited to $6,500 per year or $7,500 per year if over the age of 50 like the Traditional IRA.

What are Non-Qualified Accounts?

These accounts are the opposite of Qualified, so there isn't any tax benefits with these accounts, but they don't have nearly the same amount of rules. They can be considered your checking and savings account, Individual accounts, Joint Accounts, Trust Accounts, etc. Money can be invested in stocks or funds, much like Qualified Accounts.

There are no tax benefits when money is contributed.
There is no maximum amount you can put into a Non-Qualifed account.
There is no Required Minimum Distribution Amount.
You can take money out at any point in time.
Money does not grow tax-free. Any interest, dividends, or realized gains earned in that year is taxed in that year.

If you'd like to discuss which of these accounts would work best for your business, Book a Free Intro Call.

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