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Layin’ It on the Line: Should small business owners use annuities in retirement income planning?

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Lyle Boss

“Whether a business owner is a sole proprietor or a corporation or other entity, an annuity can help them create a more solid, predictable retirement strategy.” — Lyle Boss

Many business owners find saving for retirement exceptionally challenging and somewhat frustrating. Smaller businesses, for example, tend to have lean years when they feel setting aside money for tomorrow is neither possible nor practical.

Even larger entrepreneurial ventures tend to focus on growth so that most of their revenues wind up back in the business and not in retirement plans.

If you are a busy entrepreneur or small business owner, you may not be concerned about your financial future right now. Or, you assume that you’ll be able to sell your business and use that money to fund your retirement. However, even in the best economic times, only around 1 of every 5 companies that go on the market sells. And many of those that eventually sell do so for less than the owner anticipated. With that in mind, you may want to consider purchasing an annuity to help create a personal pension if your business doesn’t sell when you are ready to retire or you have a shortfall of accumulated savings.

Many small business owners and self-employed individuals don’t consider annuities because they have incorporated and believe that annuities are available to living persons only. While it’s true that annuity accounts are people-based vehicles, trusts, corporations and partnerships can still own them. An entity can own an annuity if it is based on a living person listed in the contract as the annuitant. As specified by the contract terms, once the last annuitant or annuitants are deceased, the contract ends, and you cannot appoint a replacement.

Entrepreneurs may also shy away from annuities because corporately owned annuity accounts have a different tax treatment than those owned by living persons. Typically, annuities grow tax-deferred for individuals. Taking advantage of compounding growth, an annuity owner may opt to defer taxes for their entire lifetime. When they pass, their estate or heirs are responsible for taxes owed.

For a nonliving entity, annuity taxation works somewhat differently. The IRS designates all corporately owned annuity accounts as “nonqualified.” Partnerships, trusts and corporations cannot defer taxes. This status means those accounts are subject to ordinary yearly taxes based on the policy’s growth.

Tax treatment aside, however, there are reasons a business might include annuities in their financial planning. For the over 60% of business owners who report having little to no retirement savings, an annuity can create a guaranteed stream of predictable income to supplement Social Security and cash savings. Most of the other advantages of an annuity are the same whether owned by a natural person or a corporation.

There are no IRS-mandate contribution limits with an annuity, unlike qualified retirement savings plans. The lack of caps means you could put thousands of dollars at a time into your contract. Annuities can also help businesses mitigate risk by paying guaranteed rates for set periods.

Certain kinds of annuities, such as fixed-indexed contracts, are not correlated to the stock market. Your principal is protected, and you don’t lose value when things get volatile. Some annuities also offer optional add-ons, such as long-term care, disability or death benefits, providing business owners with protection and peace of mind.

Take it from the Boss: If you’re a business owner or other self-employed professional, you must build a portfolio of assets to take of yourself and your family when you retire or sell your company. Even if you believe you’ll be able to sell your business for a profit, having an annuity can still be a wise move to ensure less stress and greater peace of mind when you no longer have income. Consult a financial advisor specializing in retirement income to determine if an annuity makes sense for you or your company.

Lyle Boss is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.

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