Tax Reduction Podcast

Episode 21. Retirement Tax Strategies for S-Corporation Owners

• Boris Musheyev • Episode 21

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Discover the top 2024 retirement tax strategies tailored for S-Corporation owners. Learn how to maximize your savings with solo 401(k) and SEP IRA plans and understand how these tax strategies can benefit your S-Corporation or LLC. We'll dive into effective retirement planning techniques that not only help you save for the future but also optimize your tax deductions and write-offs. Don't miss out on essential tax planning advice designed to help you achieve your financial goals.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

You're probably having a really, really positive cash flow in your S-Corporation. Now you're thinking, hey, should I start putting money away into my retirement account? Will I get a tax benefit, or should I put the money into real estate? And if I do put it into retirement, what type of a tax benefit do I get? I'm going to break it down for you into what types of two retirement accounts that we have in the United States and in the tax code. Then we're going to talk about the three most common types of retirement accounts for an S-corporation owner We've got a SEP IRA, solo 401k and the 401k with employees and how to structure that to maximize your savings. Then I'm going to walk you through a very detailed example and at the end we're going to talk about hey, you business owner, does this make sense to you? Does everything that we talk about the tax strategy, the tax write-off, the future retirement income does it make sense for you or not as a business owner? Ready, let's get going.

Speaker 2:

Welcome to the Tax Reduction Podcast for money-making entrepreneurs with Boris Mushaev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

Thanks so much. Now let's get started. Now let's talk about how it works. Now you have to understand that in the United States tax code right we've got two types of retirement accounts, like really two main types. One is traditional and one is Roth.

Speaker 1:

Traditional basically means you get a tax write-off. If you put away $69,000 from your taxable income into a traditional retirement account, that $69,000 is basically being deferred at the time of retirement. So when you do retire, that is when you're going to pay taxes on it. Not only are you going to pay taxes on that $69,000 in our example, but also on anything that he has earned in that retirement account. So really think about it this way Whatever you get a write-off right now, it is taxed to you at the retirement.

Speaker 1:

The second type of retirement contributions that we have is a Roth retirement. Basically, that means you don't get to write off anything that you put into there, but everything that you do write off excuse me, everything that you do contribute does not get taxed to you at the time when you retire, and anything that it earns in that retirement account becomes tax-free. Roth IRA, by the way, is one of the greatest tax strategies out there for you to basically have a tax-free income, but it doesn't work for everyone, and that's exactly what we're going to talk about here today. And before we continue to the three most common, we'll be back right after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Borah has put together a free PDF for you, the business owner Seven Tax Write-offs Every S-Corporation Business Owner Must Know. In this PDF, you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

Great. Welcome back. Now let's talk about the three most common types of retirement accounts. So we've got a SEP IRA. A SEP IRA really works if you do not have any other employees. So do not make a mistake thinking that I can continue using SEP IRA if I have employees.

Speaker 1:

Now, sep IRA the contribution to the SEP IRA if you're an S corporation owner okay, 25% of your W-2 salary. So, basically, if you pay yourself $100,000, then you can only put away $25,000. The maximum contribution that you can do is $69,000. Now you might think well, boris, I want to do $69,000, but if I pay myself a $100,000 salary, I can only do $25,000. That's one of the biggest drawbacks, okay, because in order for you to maximize your $69,000, and, by the way, you can put away $76,000 if you're over the age of 50, in order for you to maximize the $69,000, you have to maximize your salary and pay yourself $276,000 on a W-2. Now, paying yourself a really high salary defeats the purpose of having an S-corporation, really, because what happens is that you're going to end up paying 15.3% self-employment taxes, which is Social Security and Medicare. Now, social Security is limited to like $168,000, but then you've got unlimited Medicare tax, so to speak of 2.9% on anything that you pay yourself on a salary. So that's a lot of money. So you've got to do a cost-benefit analysis.

Speaker 1:

Hey, if I want to maximize my retirement contributions in a SEP IRA for $69,000 and I and max myself a salary, does it make sense? A lot of times, business owners do not understand this and their tax preparer does not tell them. What you need to do is work with a tax advisor. Every time you want to implement a tax strategy, you've got to speak with a tax advisor. I tell my clients all the time, all the time hey, if anything touches the word tax, I don't care what type of investment it is or what is it that you're doing. If anything that touches the word tax, you've got to call us and speak to us and strategize, because that is exactly what you, a business owner, need to be doing with your tax advisor.

Speaker 1:

Now, that's a SEP IRA. Sep IRA is very simple to set up. It's very simple to maintain. But if you really want to maximize your contributions not really a good idea to have a SEP IRA you might want to move on to a solo 401k. Now again, we're talking about in a situation where you have no employees. If you've got a partner or a spouse, that's totally okay. Same rules would apply to them.

Speaker 1:

With a solo 401k, the rules are a little different. It's the same 25% of your W-2 salary. So same thing as a SEP IRA, but with the solo 401k you can also plus right. You can defer $23,000 from your W-2 salary on top of the 25%. And if you're over the age of 50, you can do what's called a catch-up, which is $30,500, meaning to say, on top of your 25% of your salary, just like in our example of $100,000, you can do another $23,000. So in our example, if you are getting paid $100,000, your total contribution will be basically $48,000 compared to $25,000 here. So, as you see, solo 401k works great for you. But if you say, boris, I want to maximize solo 401k, what should my maximum salary be? Your maximum salary should be at $184,000. That is in order for you to get a $69,000 write-off if you're under the age of 50. But remember, you've got to be following the rules of an S-corporation for a salary and pay yourself a reasonable compensation. But in my experience I don't think IRS will ever bark at you for paying yourself higher than what you should, because you're really paying into the Social Security Medicare.

Speaker 1:

Then the next third common retirement plan is 401k with employees. Now, when you have employees, it's a different story. If you have a SEP IRA and you have employees, when you put away 25% for yourself, irs says you got to put 25% for your employees as well. Really, really defeats the purpose of this whole thing. With a solo 401k, same thing 25% of a W-2 to your employees. So it doesn't really work. It really disqualifies it. What you want to do is have a 401k with employees. Now what's the benefit here? Now, when you have a 401k with employees, what happens is that from your W-2 that you pay yourself as an owner from your S corporation, you can defer $23,000, just like with a solo 401k operation. You can defer $23,000, just like with a solo 401k, from your W-2 into your retirement account. Okay, and if you're over the age of 50, that's $30,500.

Speaker 1:

Then when you set it up, you want to tell your financial advisor, whoever's setting up your 401k, be like hey, I want to make sure I have a safe harbor match. That means I will match my employees three or four percent, however it is in your document. So let's just use three percent as an example. Let's say you make $100,000 in your business and Joe who works for you also makes $100,000 in your business. You decide you want to do $23,000 salary deferral from your W-2, right, put it into the 401k.

Speaker 1:

Joe, on the other hand, can say you know what? I also want to do $23,000. That's okay, it doesn't affect your pocket. You, as a business owner, have no obligation to match him $23,000 or pay that. The maximum you're going to pay him is 3% safe harbor match. So that's 3% of $100,000, regardless if he's maximizing his $23,000. Really, those are the three most common retirement tax strategies for you, the business owner. Now, in the next segment, right here, I will walk you through an example. How much can that grow? How much of that will be taxable and does it really make sense to you? We'll be back right after this break.

Speaker 2:

If all your accountant does is taxes, you may be overpaying in taxes by thousands of dollars every year. Every week, Boris releases a tax strategy on his podcast so that you, the business owner, can pay less in taxes every single year. Be sure to subscribe to our podcast to be notified when a new tax strategy is released. If you're ready to work with a tax advisor on your tax strategy and planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. Again, that's wwwtaxplanningcallcom.

Speaker 1:

Now let's talk about an example. So we've got Josh and we've got Emily, s-corporation owners. Both are 35 years old. So we're going to take Josh out of this example, we're going to use his contributions. They have four children, which is very common with a lot of successful entrepreneurs who are making money as corporation owners married, have children and what's the most important thing for them is retiring with wealth, retiring with money. Okay, so he wants to retire at age of 70. Okay, and we're going to assume that the return on his investment in the retirement account is 7%, because really, historically it's been 7% or more. So we're just going to stay conservative. Say 7%. He's got employees. Okay, he's got employees and he's putting away $23,000 from his W-2 salary. That's it we're going to be. We're in this section right here $23,000. Remember, he want the 401k, sep, iras, solo 401k and the 401k. They're all traditional. Okay, now can you do a Roth, a tax-free retirement for all of them? Can Josh do it with Emily? Yes, they can. That is how you structure your retirement account. You got to speak to your tax advisor about this and see what makes the most sense.

Speaker 1:

Now let's come back to our example before we get carried away. So 401k over the course he's from 35 years to 70, over the course of 35 years the total contributions, at $23,000 per year, will be $805,000. Okay, it's going to grow at 7% compounded annually. If he's contributing it on a monthly basis from his paycheck, it's going to grow at 7% compounded annually. If he's contributing it on a monthly basis from his paycheck, it's going to grow to $2.5 million, almost $2.6 million. So the total retirement account will be $3.4 million. Now Josh can choose how that $3.4 million will be at age 35, when he's planning this right Now. If he's a traditional 401k, which is the traditional right here he has employees okay, then he's going to pay tax on the entire $3.4 million. Okay, at his retirement. Why? Because he got a write-off over the course of his life for $805,000. He earned 2.6. Now he starts drawing on that retirement. That's $3.4 million. Now if Josh decided that he does not need a write-off for whatever reason and we're going to talk about why let's say Josh said I don't want this write-off Then you could have a 401k, you as a business owner that is a Roth 401k, and you can have your $23,000, for example, completely not taxable to you.

Speaker 1:

So the $3.4 million at the age of retirement will not be taxable. But what did you decide? What type of decision did you make as a business owner, with your tax advisor? Do you want to set up a retirement account that is taxable to you in the future, or do you want to set up a retirement account that is not taxable to you in the future? And that is the case with Josh, right, he's going to retire with a taxable income of $3.4 million in his retirement, which is, again, it's better than having $805,000. That's for sure. Right, he's been contributing. It grew, it grew. It was an investment, but now it is a taxable investment.

Speaker 1:

Now the question really comes down to should you use this strategy? It depends where you are in the business. Okay, first of all, the first thing I'd like to look at is your profit and your tax bracket. If your tax bracket is very low, especially when you're first starting out like you're in 15 at 20 tax bracket between federal and, I don't think it's worth it for you to take a deduction, because when you retire, you're most likely going to be in a much higher tax bracket, contrary to the popular belief. Oh, you're going to retire with a lower tax bracket. What kind of world do you live in? Do you want to retire poor? You want to retire with money, so you're most likely going to be in the highest tax bracket. So if you are in a lower tax bracket right now, don't take this right off. Don't use a retirement strategy as a right off or set up for yourself a Roth.

Speaker 1:

That is what I would recommend and that is the conversation that we're having with our clients. You've got to assess it. Should you invest and does it make sense for you to use this tax strategy so that really comes down. The first and foremost thing, I would say your bracket. The second thing is that do you have other investments? There are some business owners like Boris I don't want to use retirement strategy anymore. I just want to set this up for my employees to do the employee retention. But I want to invest in real estate. I'll make more money, more return on real estate. Great, Okay, that is your decision, but my job is to educate you about these different scenarios and options that you have. Again, all the show notes are in the description below in a free PDF for you. Thank you so much.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.