Tax Free Retirement For Business Owners

Imagine for a minute - You need $45,000 per year income for retirement but you have to withdraw $100,000 to get it because $55,000 went to taxes!

Shocking isn't it? That exact situation is what lot of wealthy business owners will be facing when they finally decide to hand the reins over to a new driver for their business. If you invest in tax deferred investments you will pay taxes when you withdraw money.

Tax deferred investments offer a tax break right now but it is miniscule compared to the growth of that investment over 20, 30, or even 40 years. It is not worth it for wealthy business owners to only use tax deferred investment vehicles. They always have their place but there are better options.

Consider this, if you need $100,000 to live on each year you will need to save a certain amount of money to make sure you do not spend your principal down thus depleting your retirement income generating assets. How much will your principal need to be? It depends on two things, your tax rate and the rate you are going withdraw each year.

For our purposes let's assume a 5% annual withdrawal with extra earnings left in the investments to increase the principal value and assume a 45% tax rate. Taxable income first, $100,000 in spendable income needs to come from a $181,818 withdrawal. You need to withdraw $181,818 to get $100,000 that you can spend. The rest goes to taxes. The principal value needed for $181,818 dollars to equal a 5% percent annual withdrawal is $3,636,363.

Contrast those numbers with a tax free investment vehicle. To get $100,000 in spendable income you need to withdraw $100,000. The principal value needed for $100,000 to equal a 5% annual withdrawal is $2,000,000.

If you are saving in taxable accounts you need to save $3,636,363 and if you are saving in tax free accounts you need to save $2,000,000. That is $1,626,363 less than the taxable account.

What does the lowered savings requirement mean to you?

You can retire earlier. You can retire with much more income if you decided to keep working after your possible retirement date due to your retirement savings being complete. You can have your retirement savings finished much earlier in life to create choices, choosing to keep working or to live your passions. And last but not least, you can create much more wealth for your heirs and your legacy to your family.

For more on tax free business retirement ideas read - Business Owners And Tax Free Retirement

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