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succession planning

Don’t neglect your succession planning

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Succession planning

Succession planning can be one of the most difficult issues faced by a family-owned business. As a business owner nearing retirement, how do you transfer leadership (and perhaps ownership) and keep the business running smoothly? Unfortunately, many businesses don’t survive the transition to the next generation.

As with most business problems, good planning is the key. You’ll need to consider four sets of issues:

  • Choice of a successor. Often the first preference is for a family member to take over. But the obvious family members may lack the skills, temperament, or interest to run the business. Sometimes several family members are interested in the position, and family squabbles or rivalries can interfere. That’s why an outsider is often chosen as an independent manager.
  • Transfer of ownership. Whether or not a family member takes over the top position, you’ll still eventually need to transfer ownership to the next generation. That involves questions of estate planning, taxation, and form of business. This is an area where you’ll need sound legal and accounting advice.
  • Liquidity. Often a transfer of ownership involves issues of liquidity and funding, especially if it happens upon the death or disability of the founder. You’ll need to consider key man life insurance and disability insurance, as well as tax and estate planning issues.
  • Personal issues. In a family-owned business, it is often very difficult for the founder to retire and hand over his or her “baby” to someone else. And if a family member is the successor, the potential for interpersonal conflict increases. It’s essential to confront and discuss this issue beforehand. It can be useful to have one of your professional advisors mediate these discussions.

One factor is common to all business successions. It’s never too soon to start the planning. Don’t delay until retirement is imminent. This is a mistake for two reasons. First, your initial succession attempt may not work out. Second, a sudden accident or illness may force you to change leadership earlier than expected.

If you’re facing this situation, please plan now to do something about it.

Contact us for more information.

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Retirement Account Funding

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While there are many tax-advantaged retirement savings plans, the various options and rules can make the most sophisticated of us cringe. One of the things to consider is whether you can continue funding your retirement account after you reach the age of 70 ½ (6 calendar months after you reach your 70th birthday). Here is what you need to know if you wish to have this option.

The Basics: the 70 ½ age-based limit

A number of retirement accounts no longer allow you to contribute funds after you reach age 70 ½ or older. Many of these same accounts also trigger Required Minimum Distributions (RMD) rules after this age 70 ½ date. So not only must you stop contributing funds into your retirement account, you must also withdraw some of it and pay income tax on the withdrawal. This is true with 401(k) accounts after retirement and traditional IRA accounts. The RMD rules aside, here are some options for you should you wish to continue making retirement plan contributions.

Some Options

  1. Look into Roth accounts. Roth IRAs and Roth 401(k) accounts allow you to continue making contributions after 70 ½. In fact you can continue to contribute into these accounts for as long as you have income. However, there are differences. Roth IRA’s have income limitations and are not subject to RMD rules. In the case of a Roth 401(k), you can contribute as long as you are working and are a participant in your employer’s plan, but you are subject to RMD regulations. While contributions must be made with after-tax earnings, your marginal tax rate is probably lower once you reach retirement age.
  2. The SIMPLE IRA option. There is not an age limit for contributions into this type of small business IRA account. So if you plan to continue to build your retirement nest egg after reaching age 70 ½, look into this type of retirement plan. An added bonus in this retirement account is that continued participation also includes receiving any employer match funding. The downside is that this plan requires annual distributions after reaching the 70 ½ year old age limit.
  3. Contributions while still working. If you work for an employer after retirement age you can continue to participate in employer sponsored plans. So if you are looking to supplement your income after age 70 and your employer offers a 401(k) or similar program you can continue to participate no matter your age as long as you are employed and are active within the plan.

The rules around retirement plan contributions and distributions are complex. Not the least of which are rules placing limits on 5 percent or greater owners of small businesses. Should you wish to explore your contribution options, please ask for assistance prior to taking action.

Contact us for more information.

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Forced to Withdraw from Retirement Accounts?

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What you need to know

We’re always being reminded to save for retirement in tax-advantaged accounts like 401(k)s or IRAs. But did you know the government does an about-face and forces us to take money out of those accounts once we reach retirement? It’s called the required minimum distribution (RMD) rule. Here are some tips you should know about RMDs well before you reach retirement age.

RMD penalties are high. RMD rules require you to withdraw a certain amount of money every year from tax-deferred retirement plans like 401(k)s and traditional IRAs after you reach age 72 (70 1/2 if you reached the age before January 1, 2020). These withdrawals are then taxed as ordinary income. If you don’t follow the rules, the IRS can assess a penalty equal to 50 percent of the amount that should have been withdrawn, on top of the regular tax due.

Start thinking about RMDs early. One of the biggest mistakes retirees make is waiting until age 72 to start thinking about RMDs. Remember, you can start withdrawing funds without penalty after you reach age 59½. If you start planning a tax-efficient withdrawal strategy before RMD rules kick in, you can manage what tax rate will be applied to your retirement distributions. With careful planning, smart taxpayers can easily reduce the federal tax rate they pay on their retirement distributions by 5 percent or more.

RMD amounts are based on complex tables. How much you’re required to withdraw is based in part on the average life expectancy of someone your age. A calculation based on complex IRS life expectancy tables, plus your retirement account balance in the prior tax year, is used to determine your RMD. The good news is that the financial institution handling your retirement account will usually do the calculation for you.

There are exceptions to distributions if you still work. If you reach 72 and you’re still working for an employer providing you with a 401(k), you usually don’t have to take an RMD from that account as long as you don’t own 5 percent or more of the company. However, you still must take RMDs from other plans where you have assets.

Not all accounts require distributions. Remember, not all retirement accounts require you to take an RMD. Roth accounts, for example, are exempt from RMDs and give you some extra flexibility to manage your other taxable withdrawals during retirement.

RMD rules can be confusing and are a good example of why tax planning is such an important component of a retirement strategy. Contact us to learn more.

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Tips for retiring into a bear market

You’re approaching that long-awaited day when you can say goodbye to full-time employment. But you’ve been listening to the dire predictions of financial pundits. Not exactly encouraging stuff. Should you continue to plug along at work and ride out the storm? Or should you retire as planned, even if the market’s headed for a significant downturn?

Tough questions. Unfortunately, there’s not a one-size-fits-all answer.

Take a deep breath. Forget about the stuff you can’t control: the stock market, interest rates, government programs, the world economy… etc. One of the biggest hazards of retiring into a declining market is “sequence of returns” risk. That’s the problem of taking withdrawals — especially early in retirement — from a portfolio that’s headed in the wrong direction. Once shares are sold, fewer shares are available to profit from future market recoveries.

Nevertheless, you can take steps to cushion the transition even when retirement accounts are performing poorly. Here are four suggestions:

  • Think about pulling funds from other assets. If you have cash in “buffer accounts,” tap those sources first. If not, consider reverse mortgage or home equity lines of credit. Both may have significant upfront costs, but establishing a line of credit early in retirement can help you defer substantial withdrawals from your retirement accounts.
  • Consider selling your house and moving. Many people find that retirement is a great time to downsize and move to a less-expensive location. Proceeds from the sale can provide enough cash to cover expenses as you wait for the market to recover.
  • Set a realistic budget. Don’t just guess what you’ll need. Do the math. Establish the habit of living within your means, before and after you leave your job.
  • Seek professional help. A financial advisor can help you map out a plan for your golden years.

Contact us to learn more.

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Applying for the SS spousal benefit? Get the facts

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Deciding when to apply for Social Security benefits can be confusing. It’s a decision that can impact your retirement income for decades. Spousal benefits, especially, are easily misunderstood. Here are three questions to consider:

  • What is a Social Security spousal benefit? As the term implies, it’s income provided under the Social Security program to spouses, current or widowed. (An ex-spouse may also qualify under certain circumstances.) If your spouse or ex-spouse paid into the program, you may be eligible for this benefit, even if you never worked under Social Security.
  • How much will I receive? Your monthly benefit consists of two parts: the amount based on your own work history and the spousal benefit (if applicable). Let’s say you’re entitled to a monthly benefit of $800 and your higher-earning spouse is eligible for $2,000 a month at his or her full retirement age (FRA). Because half your spouse’s benefit ($1,000) exceeds your own benefit, you’re entitled to a spousal benefit for the difference. In this scenario, you could collect an additional $200 ($1,000 minus $800) each month.
  • Can I claim a spousal benefit if my spouse isn’t currently drawing Social Security? No. However, if you’re filing based on an ex-spouse’s work record, you may be eligible, even if that person hasn’t filed for his or her own benefits.

    The spousal benefit rules are complicated. You’ll want to consider your spouse’s timetable for claiming Social Security benefits, your own benefits, your spouse’s likely longevity (a death can affect widow’s benefits), previous marriage history (if you expect to claim benefits based on a divorced spouse’s work record), and numerous other factors.

Check out the Social Security Administration’s Benefits Planner: Retirement page for more information. Contact us if you have questions about how your Social Security benefits will affect your taxes.

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Solo 401(k) plans: A retirement plan option for one-person businesses

Many business owners have considered 401(k) plans to be retirement plans for large companies. Though there is no requirement to have a certain number of employees in order to establish a 401(k) plan, the high costs of setting up and administering a 401(k) have made these plans unappealing to small businesses. Now, one-person businesses are discovering that 401(k) plans are worth another look.

  • How does a 401(k) plan for a one-person business differ from a 401(k) plan for a large company? Unlike a traditional 401(k), these plans are designed specifically for one-owner businesses where the owner is also the only employee. They are referred to by various names: uni-401(k), one-man 401(k), mini-401(k), and solo 401(k) plans. Administratively, these plans are less complex, less burdensome, and less costly to manage than traditional 401(k)s.
  • What makes solo 401(k) plans simpler? Because a solo 401(k) covers only one person – the business owner who is also the only employee – the complex 401(k) rules on coverage and nondiscrimination do not come into play.
  • Are lower costs and simpler administration the main benefits of a solo 401(k) plan? No. Depending on your earnings, you may be able to contribute more to a 401(k) than to another plan. Larger contributions may be possible because both the owner-employee and the company can make contributions for the benefit of the business owner. Since they allow higher contributions than other plans, such as SIMPLEs and SEPs, 401(k)s give you more opportunity to cut your taxes while building a bigger retirement nest egg.
  • How much can an individual put into a solo 401(k) plan? You can elect to contribute up to 100 percent of your earnings to the plan, subject to a specified annual limit. If you’re 50 or older, you’re allowed to make additional “catch-up” contributions.
  • Are these contributions tax-deductible? These contributions are actually called “elective deferrals,” and they are excluded from your taxable income rather than being deducted from it. Your contributions are subject to social security tax, but they will not be subject to income tax until you withdraw money from the account.
  • What can the business contribute to the plan? Your business can make tax-deductible contributions to your account ? up to 25 percent of your wages, or 20 percent of net self-employment earnings. There is an overall dollar limit for the combined contributions you and the business can make each year.
  • Does the business have to be a corporation in order to have a 401(k) plan? No. Both incorporated and unincorporated businesses can set up a solo 401(k) plan. Even if you’re self-employed, you’re still considered an employee of the business.
  • Can you borrow from a solo 401(k)? Yes. That’s another benefit to an individual 401(k); you have access to the money you’ve invested. While borrowing against SEPs or SIMPLEs is never allowed, 401(k) plans allow you to borrow as much as 50% of the balance in your account, up to $50,000.
  • If you have retirement money in other plans, can it be rolled over into your solo 401(k) plan? Yes, you have the option of rolling over money from other eligible retirement accounts into your 401(k) account. Doing so may make it easier for you to track investment returns.
  • Are there any disadvantages to a solo 401(k) plan? Yes. Perhaps the main problem is that if your business grows and you hire employees, your 401(k) plan must also cover them. Your plan then is subject to all the complex rules and costly administration of a regular 401(k) plan. Because nondiscrimination rules would no longer allow you to make large contributions just for yourself, the main benefit of having a solo 401(k) would be lost. In certain situations, a solo 401(k) plan is an excellent way to cut current income taxes while putting away large amounts for a business owner’s retirement. Before making any decisions, investigate not only a solo 401(k) but also other retirement plan options available to you.
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IRS Rules Make Retirement Plan Withdrawals Mandatory

Do you own a traditional IRA, SEP-IRA, SIMPLE IRA, Keogh plan, 401(k) plan, or 403(b) plan? If so, you’ll have to start taking distributions when you reach age 70½. If you don’t, you’ll forfeit 50 percent of the amount you should have taken but did not.

The RMD rules apply to the plans mentioned above, but not to Roth IRAs.

Here are the requirements.

  • You may take your first distribution any time before April 1 of the year following the year in which you reached age 70½. However, a first distribution taken after the year you turned 70½ still will be credited to the year you actually reached the required age. You’ll then have to take another distribution by December 31 of the current year, forcing you to pay income tax on two distributions in the same year.
  • You must take each subsequent distribution by December 31 of the applicable year. To avoid the 50% penalty, give your plan administrator enough time to process the distribution and get it to you by year-end.
  • The amount of your RMD is computed using Uniform Lifetime Tables issued by the IRS. These tables provide percentages that are applied to the value of your retirement account as of December 31 of the year preceding your distribution.
  • If you’re still employed at age 70½, you may be able to delay withdrawing from your current employer’s plan until you actually retire.
  • You and your spouse may not take distributions from one another’s accounts to make up your RMDs. However, if you individually own more than one IRA, you may compute a combined RMD and withdraw it from one or any combination of the accounts. RMDs from non-IRA plans, such as Keogh or 401(k) plans, must be computed for and withdrawn from each separate account.
  • You may take distributions in monthly, quarterly, semi-annual, annual, or irregular increments, as long as you reach your required total each year.
  • Since RMDs are taxable, consider making quarterly income tax estimates to cover your liability, or instruct your administrator to withhold taxes from each distribution.

Financial institutions must either inform retirement account owners about their required distribution amount, or they must offer to calculate it upon the owner’s request. Banks, brokers, and other custodians must also inform individuals about the deadline for taking their minimum withdrawals.

Financial institutions must report your name to the IRS if you’re required to take a distribution. This will alert the IRS if a distribution fails to show up on your tax return.

 Complexity remains

Current rules make calculating your distributions simpler, but retirement plan rules remain complex, and they differ for each type of retirement plan.

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Retirees and Taxes

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When it comes to taxes, growing older can have its advantages. But older individuals may also have additional tax-related requirements. Here’s a quick overview of the tax and financial breaks available as you reach a certain age.

Higher standard deductions. You’re eligible for a higher standard deduction once you reach age 65.

Tax credit for the elderly. You may qualify for this direct credit against taxes if you’re age 65 or older during the tax year. There are limitations if your tax-free pension benefits, such as social security, exceed certain levels. Income limitations also apply.

Tax breaks for social security benefits. Generally, you’ll pay no tax on social security benefits if the total of one-half of the benefits plus all other income is less than $25,000 (singles) or $32,000 (married filers). Above those levels, you’ll pay tax on up to 50% of your benefits. High-income seniors could be taxed on up to 85% of their social security benefits.

Higher return filing threshold. Because of the higher standard deductions and potentially tax-free social security benefits, your taxable income may not reach the filing threshold and you may not need to file a federal income tax return. You may need to file for other reasons, though.

Higher contributions. Once you reach age 50, you may contribute more to your retirement accounts. Also, at age 55, you can contribute an extra amount to a health savings account.

Reverse mortgage. If you’re at least 62 years old and own your own home, you can use a reverse mortgage to convert your home into nontaxable income. With a reverse mortgage, the lender makes loan advances to you which don’t have to be repaid until your death. Repayment of the loan and accrued interest would also come due if you sell the house or move, but you won’t have to repay more than your home is worth.

Home sales. You may plan to sell your home if you move or want to downsize in retirement. Couples who file a joint tax return can keep up to $500,000 of the profit on a home sale tax-free ($250,000 for singles).

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Six questions every family business should answer

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Tax and business planning is important for the success of any organization, but especially for the family-owned enterprise. Here are some important questions that owners of family businesses need to address.

1. Do you have a plan? Without a plan, your business has no direction and possibly no future. You can be sure your strong competitors have written plans. Write a business plan that includes both short and long-range goals. Include specific goals such as profit, growth, and market-share targets. Plans for conflict resolution and transition should also be included.

2. Who’s running the store – family, outsiders, or employees? When several family members participate in the company, an organization chart should be drawn to clearly show lines of authority. Promotions should be based on a clear, fully understood set of guidelines.

3. Should the legal form of the organization be changed? Whether your business is a sole proprietorship, a partnership, a regular corporation, an Scorporation, or a limited liability company, you should review your business form periodically to see if it’s still the best choice for your business. The legal form under which you operate can make a difference in the taxes you pay, the costs of doing business, and the amount of paperwork and red tape you’ll have.

4. Have you reviewed your retirement and fringe benefit plans? The types of plans available depend on your business form. Besides being an excellent tax planning tool, such plans can be effective in motivating and retaining employees.

5. Are formalities observed? Family members occasionally overlook the fact that business assets are not personal assets. Company loans to family members need to be documented. Shareholder or employee use of corporate assets, such as automobiles, may have income tax consequences. Get advice so you structure transactions properly.

6. Who’s next in line? Many family businesses are lucky enough to have a very strong member at the helm. But that person won’t live forever.

The survival of any family business depends on how wisely one generation passes ownership to the next. The more family members, the more complex the situation is likely to become.

Facts show that only 30 percent of family-owned businesses survive to the second generation, and only 13 percent survive to a third generation. Careful planning while you’re still at the helm may prevent the demise of your business.

Gilliland & Associates, P.C. is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

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What is the Right Retirement Plan for Employees?

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Small businesses and self-employed individuals often tune out when conversations or articles about pension plans come up. That’s just for big business, they think, not for little guys like us. But small firms can tap into the tax breaks of pension plans more easily than they might imagine.

Pension plans provide tax deductions for the business and tax-deferred earnings for the employee. The establishment of this important fringe benefit can also reduce employee turnover by increasing employee job satisfaction.

There’s never been a better time to offer a retirement plan to your employees. Many plans are easy to implement, require little paperwork, and reduce your tax bill.

Selecting the right plan for your business begins with understanding your choices. Each plan has advantages and drawbacks. To help you decide which might be appropriate for you, here are highlights of some common plans:

Simplified Employee Pension (SEP) Plan. Also known as a SEP-IRA, this retirement plan lets you establish individual retirement accounts for yourself and your eligible employees. You can also have a SEP if you are self-employed. Setting up a SEP can be as simple as completing a short, written agreement. Other than annual disclosure statements to employees, there are no filing requirements.

SEPs can be funded only by employer contributions, but they offer flexibility because you decide each year how much you want to contribute. Annual contributions for each employee are based on a percentage of compensation, with a maximum dollar limit. Unlike other plans, SEPs can be established up until the extended due date of your tax return.

The 401(k) Plan. The 401(k) plan is a type of employer-sponsored retirement plan that allows participants to contribute a certain percent of their salary each year. Employers can match employee contributions. An employee is not taxed on either his contribution or the employer’s contribution until withdrawal from the plan. The earnings on the account also accumulate tax-deferred.

There are requirements that prevent highly compensated employees from contributing large amounts while the rank and file contribute little. A 401(k) is more complicated to maintain than a SEP, and it has annual IRS reporting requirements.

Individual 401(k). An individual 401(k) plan can be set up by a business – incorporated or unincorporated – where the owner is the only employee. Such plans are designed to be somewhat less complicated than traditional 401(k) plans. Their major advantage is that they allow higher contributions than other plans.

Savings Incentive Match Plan for Employees (SIMPLE). Like a SEP, a SIMPLE plan consists of individual retirement accounts (IRAs) for yourself and eligible employees. Alternatively, a SIMPLE plan can also be established as a 401(k) plan. Either type can easily be set up with a bank or insurance company using a “model,” or standard plan document. In a SIMPLE plan, employees can make voluntary contributions through payroll deductions, and employer-matching contributions are required.

There are two requirements for setting up a SIMPLE plan: you must have 100 or fewer employees, and you cannot offer another retirement plan. Also, a SIMPLE plan must generally be established before October 1 of any calendar year.

Qualified Plans. Qualified Plans also known as Keogh (or H.R. 10) plan is a retirement plan for self-employed people and their employees. If you have earnings from self-employment, whether full-time or part-time, you are probably eligible to establish a Keogh plan.

Qualified p\Plans have lost much of their popularity because other plan options provide much of the same benefits, but require much less administrative paperwork.

There are two major types of Qualified Plans:

  1. Defined contribution plans require contributions based on a percentage of wages (for employees) and profits (for owners). The benefits that the participants will receive at retirement depend upon how much these contributions and the earnings on them have accumulated to at retirement time.Defined contribution plans in several forms including money purchase plans, target benefit plans, and profit sharing plans. The advantage to a profit sharing plan is that the amount of annual contributions can vary from the maximum to no contribution at all depending on the profitability of the business. Annual contributions are required for money purchase plans.
  2. Defined benefit plans require contributions based on the amount of the retirement benefit the plan is to pay out. An actuary must be used to determine the required annual contribution. Benefits that a participant may receive upon retirement are limited by law.

All Qualified Plans have more complicated reporting requirements than a SEP or SIMPLE-IRA plan. Business owners cannot cover just themselves in these plans; they must make contributions for employees as well.

Qualified Plans must be established by December 31 of the tax year in which you want to take a deduction for a contribution. Contributions can be made up to the due date of the company’s tax return, including extensions.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

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