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Use This Easy Method to Reduce Your Taxes and Protect Assets from Creditors

March 19, 2012

Alexander, Ed, OrlandoBusinessLawyer.com, “Use This Easy Method to Reduce Your Taxes and Protect Assets from Creditors.” http://www.orlandobusinesslawyer.com/use-this-easy-method-to-reduce/ Posted: Unknown. Retrieved March 19th, 2012.

Small business owners fail to take advantage of one of the most lucrative ways to save taxes and protect assets from creditors.

Many business owners want liability protection and ways to lower taxes, often considering offshore accounts and trusts and other complicated and costly options, according to Gerard Martinez, Sr. Vice President with GunnAllen Financial, in Maitland. He says that, often, they don’t realize that one of the easiest, low cost and most effective ways to accomplish this is a business retirement plan.

A business retirement plan for your business will reduce your taxes because the government becomes your savings sponsor. It helps you by letting you use money you’d normally pay in taxes as retirement savings.

For each dollar of income you contribute, the government “lends” you $0.10 to $0.35, depending on your tax bracket.

This is because in order to save $1.00 you have to earn between $1.11 and $1.39. The extra $0.11 to $0.39 are taxes you pay.

With a retirement plan, though, you don’t pay those taxes until you get the money from the plan. The tax is deferred. So, you only have to make $1.00 to invest $1.00.

And, your investment grows tax deferred as well. If you realize a 10% return, all of your earnings go into your account. None is siphoned off to pay Uncle Sam.

The basic retirement plans available to small businesses include the SEP IRA (Simplified Employee Pension IRA), the SIMPLE IRA (Savings Incentive Match Plan for Employees) and the individual 401K plan.

For businesses with employees or part-time business owners, the SIMPLE IRA is a good option. With a SIMPLE IRA plan, each eligible employee can contribute between $0 and $10,000 (but not more than the employee’s wages), tax deferred. For employees 50 or older, an additional $2,000 can be contributed.

The business either: matches the employee’s contribution, up to 3% of her wages if that is less than or equal to her contribution; or contributes a flat amount of 2% of her wages even if employees make no contribution.

SIMPLE IRA plans permit a two year waiting period for participation at the owner’s option. New employees (or those who jump from job to job) would wait to participate as an incentive to stay with the company.

The SIMPLE is also easy and creditor safe. The IRS provides free model paperwork to set up the plan and the money can’t be touched by most creditors.

So, why is this a great deal? After all, you still have to contribute for employees.

Say your business has five employees, including you and your spouse. Your salary is $60,000 and your spouse’s $20,000. One employee has been with the business for three years, earning $15,000 per year. The other employees are employed less than two years.

To maximize the tax benefit, you and your spouse would each contribute $10,000. The business matches $1,800 for you and $600 for your spouse (3% of wages). Using IRS tax tables (www.irs.gov), you’d save $5,712 in taxes on the $22,400 invested.

But what about the employees? The two employed less than two years are not eligible. Therefore, no match is made. If the other employee elected to participate and contributed $450 or more, the business would match up to $450. (Recent statistics reveal that the vast majority of employees do not make contributions.)

Even after deducting $450 matched for the employee, the net tax savings to owner and spouse is approximately $5,262. Still a pretty good deal.

Establish a small business retirement plan today to reduce your taxes and protect assets from creditors.

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