In our last post, we
discussed the idea of using different investments to help buy-out a partner’s
interest in your business and/or accumulating capital as an additional source
of income when you sell or transfer your business to another party. A
legitimate question to ask is why bother to invest my hard earned money when
the full value of my wealth is completely tied in my business. Our team frequently encounters that
dilemma. Let me offer a few points that are worth due consideration.
First, it’s always good to
have an additional source of revenue. If
for no other reason this money can be used for an unforeseen emergency. Nevertheless, putting emergencies aside, let’s
say you do not receive a lump sum down payment for the value of your business. There is a very good chance that a buyer may
not be able to come up with what you need.
Furthermore, if the buyer were to come up with a down payment would his
offer be large enough to tie you over until installment payments begin? This is why it’s important to recommend investments
as an additional source of retirement income.
As an inside, we
enthusiastically recommend every retirement plan have three legs to stand
on. First would obviously be Social
Security. The second would be a basic
annuity Pension Plan. In the case of a
business owner it would be the value of his business. Last would be an investment account.
Now to return to our basic
question (from previous article) do you use an IRA or another form of a qualified
vehicle or do you do a non IRA, non-qualified type of investment. While each case is different, generally we
recommend using a NON-Qualified investment.
While it’s attractive to have a nice tax deduction, remember that when
you withdraw monies, the entire amount is fully taxable. You must also factor in a possible 10%
penalty for early withdrawal if your redemption occurs prior to the age of 59
and ½. This is why it’s important to
work with a financial planner along with your accountant.