I am often asked, “Chris, what do you think about retirement plans, like IRA’s and 401k’s?”
If you work for an employer, I can see why those are tempting, especially if they match you money. It won’t likely do as well as you hope it would, nor is it likely to be as good as other options, but if you’re wanting to not have to think about money, it is better than doing nothing.
On the other hand, if you are a small business owner, is a government controlled plan, like IRA’s and 401k’s, really your best option for retirement?
To answer this question, you need to see through a few myths.
1. Tax Advantages?
This one throws many people off and is usually what is a deal-breaker when I interview accountants. There are NO tax advantages to IRA’s or 401k’s! You have to pay taxes on these eventually. Even if you don’t pay while it grows, you do pay on all of it you take out. Even worse, do you think taxes will increase or decrease in the future? Anyone who has ever turned on the news in the last two decades will likely agree that taxes are likely to increase, especially since they are at some of their lowest levels since the federal income tax was introduced 100 years ago. By the way, most accountants know this to be true but they will tell you it will save you tax because you won’t pay tax on that money today. That is why it’s a deal-breaker for me.
2. Government Has Good Rules
You won’t hear someone say this very often, but many will say this about Roth IRA’s. They’ll say, “Look! You can save money or roll your other IRA monies into this Roth and not pay any taxes when you take it out!” Although that is technically true right now, they always fail to mention that the government has the right to change these tax rules, or any rule for that matter, when you take it out. Do you trust the government that much?
3. I Need a Retirement Account
Many small business owners are told to get retirement plans like these because “that’s what you’re supposed to do.” Think about this – Do you ever hear the wealthy talk about their 401k’s and IRA’s (other than the politicians who never use them for themselves)? How about Steve Jobs or Warren Buffett? Of course not! The entrepreneur/investor mindset doesn’t support saving money in government programs.
An entrepreneur’s best retirement plan is his/her own business!
Business is one of those rare investments where you can be paid serious cash flow and then turn around and sell it for more because of the cash flow. In other words, the more profit you have, the more you can sell it for. It’s possible that your company could be sold for millions…and that’s after providing you a nice living! How many tens of thousands of dollars per year would you have to save into a retirement plan. Oh, and by the way, you can still save money for later while getting paid nicely from your business.
These myths exist because the financial industry doesn’t want to lose your money!
I went to lunch with a financial planner who told me that he doesn’t think small business owners should be investing money back into their businesses because it’s “too risky.” His solution was to put money in IRA’s, 401k’s, etc (aka: Junk he sells).
I prefer to go by Carlos Slim’s philosophy (richest man in the world) when he says about investing his money in his business – “Reinvest. Reinvest. Reinvest.”
So are IRA’s and 401k’s good investments for small business owners?
Generally speaking, I would say no. I do believe, however, there are ways to save for retirement differently than the mainstream. I just don’t like saving money in places where you get a penalty for taking it out, especially if it’s being used for investment purposes, such as investing into your business.
So where do you save money? Put money in liquid places where you can access it for your business.
There are many ways you can do that. Check out our scheduled events to get more details.