Hi, I am Donna Bordeaux with CalculatedMoves.com. I often see that financial advisors recommend making Roth IRA Contributions or Roth 401(k) Contributions for business owners. Their typical default method is to try to do the Roth version of retirement before all others. But, I want to tell you I don’t think that’s a great idea for small business owners.
If you are a small business owner and you are earning income in your business, which is generally when you want to contribute to a retirement plan, you’re probably dealing with taxes. Minimizing your taxable income is a benefit to you with a Roth Contribution. You’re not reducing your income in any other form with a traditional IRA or a traditional 401k or pension plan, you are reducing taxable income. For most folks who are small business owners and they are earning money, a Roth Contribution is probably not in your best interest.
I really only suggest Roth Contributions if it’s your last resort. And let me give you a little background, financial advisors are interested in helping you get money and they want to sell the benefits of not having tax later. However, as a tax expert, I’m looking at the problem of tax law being today’s law, not tomorrow’s law, those laws are subject to change at any time. And let’s think about how the tax situation is working today.
With all the tax breaks, the current administration is looking to remove those from small business owners and anyone making any sort of income that may be mid-class or above average. In the future when we get to the point of all of the spending is done and the handing out money is done, somebody’s got to pay for it. And the government is going to look to collect money and alternative sources.
And I truly believe that I’ve said this from the start of the Roth concept, that they will eventually make part of that or all of that subject to taxes if you have other sources of income then. So, don’t assume that today’s tax law will be with you forever. There are no promises like that, I don’t think this is going to change overnight. But, I think within a 10 year horizon, you may see some changes on this. When social security benefits first came around, they said, no, we can’t tax those people who have already paid taxes on those when they made the contributions.
Well, eventually they had a little budget crisis so they decided that if your income is high enough, we’ll tax your social security benefits, at least a portion of it up to 85%. I think we’re going to see that same repeat of history when it comes to Roth at some point in the future.
So my judgment is always if there is a tax benefit that you can get today, a reduction in taxes, let’s take it. I don’t want to delay and try to bank on the fact that tax law, later on, will be the same as it is today. So take that tax deduction today. If you have a question about how you should make contributions to your retirement plan, to best benefit you, I’d love to chat with you and tell you about how we can work with you on an ongoing basis to make sure you get the best advice that matches your lifestyle, your business, and your income. I’m Donna Bordeaux with Calculated Moves.
Donna Bordeaux, CPA with Calculated Moves
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