Retirement Planning as a Tax Planning Tool

For small business owners with a lot on their plate, each day is often busier than the last. Along with managing staff and their daily operations, overseeing the development and implementation of brand messaging and campaigns, and engaging with clients to form long-lasting partnerships, you must also view what you’ve built from a future-forward lens. After all, you won’t always be at the helm — so it’s never too early to estimate future income and expenses as they relate to your retirement. 

This article explores how the right tax strategy can be a tool to aid you in retirement planning for yourself and your business, and provides some key resources for future-proofing your legacy. 

How Retirement Planning and Tax Planning Go Hand-In-Hand 

As a small business owner focused on bolstering your organization’s cash flow, it can be all too easy to put off thinking about what you need to do to set yourself up for the future. Even if you do have a retirement account open, your busy days may not lend themselves to prioritizing the time to understand the implications of your contributions, or how much of those funds will be taxable down the road. 

A robust tax planning strategy is an essential part of any retirement plan. The process offers the opportunity to diversify your portfolio and help you to avoid problems that may occur down the road — such as “tax shocks,” where large sums are taken out of your retirement savings unexpectedly to cover tax obligations. 

An effective retirement tax plan can make your accumulated savings last longer. Based on the type of accounts you open, this process can provide tax relief today or far down the road. With the right planning, you could enjoy tax breaks in the future that don’t require you to make burdensome sacrifices now — effectively moving money from your front pocket to your back pocket for your retirement years. 

The Three Tax Advantage Options 

The types of tax advantages you will receive depend on the accounts you choose to contribute to. Here are the three most common categories for you to consider as you work with your CPA or other financial advisor to map out your retirement plan: 

  • Roth Accounts: Roth 401ks and Roth IRAs are perfect examples of “putting your money in your back pocket.” By investing in one of these accounts, you forego any tax benefits today in favor of tax-free withdrawals, income, and appreciation throughout your retirement.
    Roth 401ks are part of a select group of accounts that require minimum distributions (RMDs) to be withdrawn on a yearly basis. The general age for this requirement is 72 (or the year you begin retirement if you work past 72). Roth IRAs, on the other hand, are exempt from RMDs — and your CPA may advise you to roll a 401k account over to a Roth IRA once you retire to continue to avoid this requirement.
  • Tax-Deferred: Most other traditional retirement accounts — 401ks, IRAs, and 403bs — fall under the tax-deferred category. All of these options require RMDs by 72 unless you are still employed, but the accompanying tax benefits are effective almost immediately. Holders postpone paying taxes on each amount contributed to the account until you begin making withdrawals after retirement — allowing the investments to grow tax-free over a long period of time.
  • Taxable: Finally, you can withdraw funds from traditional brokerage and bank accounts at any time, as they are funded with after-tax dollars. These accounts are also exempt from RMDs. 

The Role of the CPA in Retirement Tax Planning

When most CEOs think of CPAs in the tax planning sense, the first thing that comes to mind is the company-facing tax return preparation and bookkeeping services that these experts can provide. But because of their close, ongoing proximity to your operations and resulting understanding of your daily obligations and tasks, CPAs can also offer a unique perspective on your personal retirement planning and tax strategy initiatives — making them a great choice for an advisory service as you think ahead to retirement. 

A CPA will help you consider multiple factors to diversify your investment portfolio — including how flexible you’d like your accounts to be when you withdraw in retirement, your current marginal tax rate, and your tax rate in retirement. Using their full-bodied knowledge of your accounts, the CPA will be able to provide you with educated advice about the next best steps. 

Chesapeake Growth Network: Your Tax Strategy Partner 

As complex as tax planning can be, this process is only the tip of the iceberg when it comes to your financial responsibilities as a small business owner. The most important step you can take to empower yourself and your organization for a safe and secure future is to seek out advice from the experts. 

Serving small businesses from Bowie to Annapolis, MD, Chesapeake Growth Network seeks to become the driving force behind your tax planning initiatives. Matt Brady, CPA, and his team work tirelessly to review each of your income streams and make appropriate recommendations about investment options — so that when it finally comes time to pass the reins of your organization on to the next leader, you will have already set yourself up for the most profitable and worry-free retirement possible.

Contact Chesapeake Growth Network for more information on our full suite of financial and legal services, or to get started on building your tax strategy for retirement. And look out for our next article, where we’ll explore the most important criteria to have top of mind while selecting a financial advisor.

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