Most of the tax advice you hear or read in the media is geared toward the general population. Business owners and investors should not follow this advice because business owners and investors are part of a special group that receives much better tax benefits than the general public.
There are so many examples to share here, but I'll focus on one that really seems to shake people up. When I share this one, I usually have a few people upset with me. Why? Because it often goes against the only financial concepts they know.
Let me first start with a question: Do you want to retire wealthy?
Of course, everyone answers that they want to retire wealthy. But, tax advice given to the general population goes against this. One of the most common pieces of tax advice given to the general population is to maximize the contribution to their qualified retirement plan every year.
The truth behind these retirement plans is that they are designed to work best for those who retire poor.
Most countries have qualified retirement plans. In the U.S., the most popular types are IRAs and 401(k)s. In a qualified retirement plan, you contribute money and get a tax deduction for your contribution. Then, the earnings inside the qualified plan are not currently taxed.
Up to this point, the result is great tax savings.
When you retire and take the money out, it is taxable. Let's look at what this really means. To do that, I'll ask another question.
Why do you contribute to a retirement plan?
The answer I get is almost always the same. Get the deduction now and pay the tax later.
In other words, take a deduction now, when your earnings and tax rate are higher, and defer the tax until later when your earnings and tax rate are lower.
Odds are you've heard this advice before. It is standard advice for the general population. This thinking makes no sense, particularly for business owners and investors. In order to be in a lower tax bracket when you retire, it means you will be making less money when you retire.
Why base your financial future around a plan that works best if you retire poor?
I wasn't kidding when I said people get upset when I share how the popular advice of maximizing your qualified plan contribution works best if you retire poor.
I usually have a line of people waiting for me after I get off stage. Most are trying to justify why they contribute to a retirement plan - their employer matches or they use the tax-free version (a Roth in the U.S.) and not the traditional version. I can tell they are beginning to look at their finances and tax planning a little differently, which can be an upsetting process.
Good News for Business Owners and Investors
Business owners and investors have much better opportunities available to them in the tax law to reduce their taxes. Often times, the tax saving opportunities available to business owners and investors are permanent tax savings - this means the tax is not deferred to a later year, it is eliminated.
Scrutinize the general tax advice you hear or read. Is it the best advice for your specific wealth and tax strategy or are there better opportunities available to you because you are a business owner or an investor?