Financial Planning with Your Business and Personal Wealth in Mind

 

Balancing business and personal wealth can be challenging. Since your overall personal financial fortunes are closely connected to your business, it can be tempting to pour all your excess funds there. But, in many cases, that’s not the most prudent long-term choice.

 

Instead, we believe you can strike a balance between your personal and business finances through careful planning and intentionality. Here’s how.

Retirement: Are You Building Toward the Personal Lifestyle You Want?

It’s repeated often, but it’s so important it bears repeating again: the earlier you start saving for retirement, the better. You’ll have extra years of earnings and growth, which will benefit you for the rest of your life.

 

While it’s easy to hear this, it can be harder to put it into practice as your business is starting out, or growing rapidly. You may feel like a little more money put toward the business will tip it towards greater success.

 

We encourage you to think of the future of your personal finances in the same vein. A little extra up front toward your retirement could make a huge difference down the line. There are many retirement accumulation accounts that provide tax advantages for business owners. A few include:

 

Traditional and Roth IRAs. In 2024, you can put up to $7,000 between a traditional and Roth IRA. (Up to $8,000 if you’re 50 or older). The two differ in their tax treatment.

• With a Traditional IRA, you put in pre-tax dollars, that can grow tax-deferred until you take them out during retirement, at which point the withdraws will be taxed as ordinary income. This option can lower your tax burden in the year you contribute.
• With a Roth IRA, you put in after-tax dollars, that can grow tax-free. With this option, you don’t lower your tax bill in the year you place the money in your account, but when you withdraw your funds, you do not pay taxes on them.

 

Simplified Employee Pension Plan (SEP) IRA. This is a solution for self-employed individuals and small businesses that works much like a hybrid between a traditional IRA and a 401(k) plan. As the owner, you must open an account for each of your employees and contribute the same salary-percentage amount to each. The maximum amount you can contribute is up to 25% of an employee’s income or $69,000 in 2024, whichever is less. The funds represent tax-deferred growth for all who receive them (including you), while as the owner, you can deduct the contributions as a business expense. This can be a good way to save for yourself—and provide your employees with an extra perk.

 

SIMPLE IRA. This acronym stands for Savings Incentive Match Plan for Employees. It’s designed for businesses with 100 or fewer employees. The paperwork to set it up is minimal, it can easily be administered by a financial institution, and it gives you and your employees a way to contribute up to $16,000 annually in tax-deferred dollars in 2024. (Plus, a $3,500 catch-up for those 50 and older.) As the name suggests, however, as the employer you are required to match your employees’ contributions, up to 2-3% of their salaries, depending on the option you choose. 

 

Solo 401(k). Designed for business owners with no full-time employees, other than themselves and their spouse. This fund typically works like a regular 401(k), with traditional and Roth options available. As with all 401(k)s, as an employee, you’re capped at the 401(k) annual limit of $23,000 in 2024. ($30,500 if you're 50 or older.) However, as an employer, you can make additional contributions to yourself. In 2024, the total combined contribution limit is $69,000, or up to 25% of your self-employment income, whichever is lower.

 

When you consider these options, remember that by giving weight to your retirement solution, you’re giving yourself long-term clarity of mind. You avoid the trap of panicked decision-making based on the belief that you have nothing but your business to rely on. Instead, by building your retirement, you’re balancing your resources, so that you have more options and so that your decision-making process can be more level-headed.

Liquidity and Risk

Once your business is past the initial startup phase, and you’re making regular retirement contributions, it’s time to consider more complex financial questions. Namely:

 

Are you diversifying your assets? As a business owner, you’re heavily invested in your sector, with its specific set of risk factors. As a result, with your personal assets, you should consider diversifying away from your business sector. That way, you have a much more diverse overall portfolio and you minimize your risk—a downturn in one area of the economy won’t necessarily sink all your investments.

 

What does your liquidity look like? Does your business regularly struggle to find working capital? Are all your personal savings in retirement accounts that can’t be used on short notice without withdrawal penalties? Are you finding a balance between growth and investment opportunities versus keeping enough capital on hand to fund day-to-day business expenses and your preferred personal lifestyle? It’s good to check on these questions regularly.

 

Do you have a recession plan? The recent pandemic clarified for a lot of businesses just how stark a change in fortunes can be. Do you have a plan should a recession hit? Do you have reserves to weather a short- or medium-term downturn? What would a substantial drop in revenue look like—and how would you pivot? Better to develop strategies now.

 

What about unexpected exits? Typically, this means the unexpected death of a business partner. While this is a legal situation, we recommend having these conversations. It may be preferable to have an awkward conversation now and set up a buy/sell agreement, rather than risk litigation later or end up managing your business with the spouse or child of your deceased business partner.

 

Life insurance for yourself. While it may also be difficult to talk about, your own unexpected exit could have substantial consequences for your family. In addition to a buy/sell agreement for your business, do you have life insurance at an appropriate amount? You want to protect your family’s lifestyle, while providing them with enough liquidity to cover any potential estate taxes.

Retiring with a Successful Business

For many, this is the goal. As you approach this point in your life, your overall mindset should become one of preservation, for both you and your business. A few things to think about:

 

Shift your investment strategy. As you get older, you have less time to wait out market volatility. As a result, preservation of wealth gains importance. Are you adjusting your portfolio to be more conservative? Are you thinking about strategies that will provide you with a regular income?

 

Keep your business even keeled. Many business owners love to find and seize the next opportunity—for some, it’s why they started in business for themselves in the first place. At this juncture, however, have a very critical eye toward major changes. Your business is already successful. You don’t want to overleverage yourself or take a major risk, just as you’re preparing to retire and/or sell your business.

 

How can you withdraw retirement funds advantageously? Once you reach 59½, you can start to withdraw retirement funds without penalty. At age 72, 73 or 75, you’ll be required to start withdrawing your tax-deferred retirement funds (required minimum distributions (RMDS)) and pay taxes on them. There are several strategies to consider as you begin to make withdrawals.

• Withdraw money when you’re in a lower tax bracket. If you have a down year, it may make sense to pull some money out of your retirement savings, since you’ll pay taxes on it at a lower rate.
• Use your Roth savings strategically. If you have a need to withdraw a lot of funds in a given year—say you’re buying a vacation home—a Roth IRA allows you to pull that money out tax-free. In some years, using your Roth IRA may make more sense than in others.
• Qualified charitable contributions lower your tax burden. Make a philanthropic impact strategically. Qualified charitable contributions can be taken once you’re 70½. As long as they are made directly from your retirement account to a qualifying non-profit, they help lower your taxable income for a given year..

               

As retirement is in sight, it really pays to talk through your specific plans with your advisor. What income do you need on an annual basis? Where will you live? How much risk are you willing to take in your investments? What is your plan, should you or your spouse need long-term care? All of these will factor into how you plan to successfully transition to the next phase of your life.

The Legacy of Your Business

The sale or transition of a business is time-consuming, it can involve surprises and it can be complicated. We advise our clients to plan for it well in advance and to work with knowledgeable and skilled counsel. Some things to consider:

 

What is your succession plan? For some, this is obvious, for others, it’s not. If you’re planning to turn over the business to one of (or all) your children, or to cede your share to a partner, have you had conversations around this? Is everyone on the same page? Will you still plan on earning money from the business, even after retirement? Or, if you’re planning to sell the business, what are you doing to prepare it? Have you engaged a team you have confidence in, to help you maximize your results?

 

The estate tax exemption is scheduled to sunset in 2026. In 2024, the exemption is $13.61 million. It should be at a similar level in 2025. Does it make sense to pass on your legacy this year or next, while the exemption is still at this level? Doing so could save your successors a substantial amount of money and boost your legacy.

 

Have you considered a trust? There are solutions that may make a transition smoother, or more tax efficient, or allow you to pass along your legacy to a minor family member, or to draw an annual income from your business for the rest of your life. As you consider your legacy and what you want, it’s important to understand these options.

 

What about your charitable legacy? As mentioned above, qualified charitable contributions are one way to make a substantial philanthropic impact. When it comes to a charitable impact, what are your goals? How are you hoping to give back and what funds are you planning on using? Answers to these questions will inform when—and how much—you give.

From the Start, the Goal Is to Pursue Your Desired Lifestyle

As a business owner, if you want to achieve your desired lifestyle, it makes little sense to plan your personal and business finances in isolation. While you have two roles, you’re still one person with one set of goals.

 

As financial advisors, our job is to listen. If you work with us, we’ll want to know your hopes and dreams, so that we can work to devise financial strategies to help you pursue them. We believe each aspect of your financial life should be used to balance and boost the other. And that’s what we’re here to help you do.