According to a The New York Times article about small businesses, “… most owners put off getting a valuation until a sale is imminent.” And when owners try to get a valuation, says The Times, few seem to know how to make a good guess. If you own a small business, do you know what it’s really worth? If you want the sale of your business to fund your retirement, a deferred compensation plan could help bridge a potential savings gap to your goal.
Executive deferred compensation plans let a person earn payment in one year, but receive the dollars in a future tax year. The Internal Revenue Code regulates nonqualified deferred compensation. And as long as you meet the government’s regulations, your compensation isn’t taxed until it’s distributed.
If you own a business and no longer qualify for a Roth IRA, then a deferred compensation plan can be a way to shelter income. While there’s no contribution limit for plans such as variable universal life, or VULs, the optimal minimum monthly premium payment we suggest is $500. If you’re contributing less than $500 on a regular basis, it’s likely not the plan for you.
The benefits of a deferred compensation plan for employers include …
- setting aside money beyond what the government traditionally allows, and
- retaining key employees, without having to spend money to fund a companywide benefit plan
The risks of executive deferred compensation plans include …
- losing money allocated as deferred compensation
If you have questions about executive deferred compensation, email [email protected].