As tens of thousands of baby boomers move into their sixties on a daily basis, they meet with their financial advisors, most of whom are employees and as such, these boomers will go without the full scope of retirement planning services.
What do I mean by that? The IRS tax code is built for business owners and many financial advisors working with companies like Northwestern Mutual, Edward Jones, State Farm, Merrill Lynch and Wells Fargo just to name a few, are all employees. Meaning they have benefits, health insurance, a retirement plan and a steady paycheck. Many of them have not personally experienced the other side of the tax code wherein you own and operate your own business.
As we look at retirement it presents numerous tax challenges. Most retirees have no real deductions left at the point of retirement. Some people can claim a mortgage deduction if your house isn’t paid off, but if you do not itemize on your tax return many don’t actually take advantage of the mortgage interest deduction. Your kids are no longer a deduction (grandkids probably should be), you no longer contribute to your retirement plan and if you don’t have earned income you can’t contribute to an IRA.
That leaves charitable giving or owning and operating a business in retirement. What could be the potential advantages of owning and operating a business in retirement? You know what you are passionate about – you know what interests you and what doesn’t. You probably have experience in the field, hobby or skill set of a potential business, so there isn’t a lot to figure out. Technology and social media may be a challenge, but resources like YouTube can give you a masters in just about any topic and your unemployed grandkids could be cheap labor not to mention the chance for you to impart some work ethic and time with family.
Setting up a business that has positive cash-flow can be rewarding to the mind and body. I am not saying you have to start KFC like Colonel Sanders did, but making an extra $10,000 – $20,000 a year and being able to deduct expenses is appealing. Let’s take a closer look. What costs are you going to have each month, like cell phones, internet and medical expenses? What if you could deduct trips to see the kids and grandchildren because it is business related? What if subscriptions to newsletters or clubs you enjoy were research for your business?
We have helped clients set up an LLC, S-Corp or C-Corp to establish an HRA (Health Reimbursement Account), which the IRS tax code allows a business to deduct 100% of medical expenses against income. According to the AARP, couples in retirement should estimate spending over $250,000 on health-related expenses. What if that was a deductible against your income and not just an out-of-pocket expense? Dentures, hearing aids, eye exams and glasses are not covered under Medicare. Furthermore, as Medicare takes on more and more people and reimbursement rates continue to fall for doctors, more and more coverage may be cash only. What if you had a way to access the care that is meaningful to you and you could deduct that against your business income?
With pension, Social Security, IRA distributions, RMD’s, rental and investment income all being taxable, wouldn’t it be nice to have earned income and some shelter against taxation moving forward?