For years I have told my clients that one of the worst places for them to invest is in a government controlled retirement vehicle such as an IRA, KEOGH, SEP, ESOP, 401(k), or 403(b). I admit, sometimes I have made this statement for the shock value because almost everyone and their dog (including the wolves at the IRS) recommends these plans. But, I am still serious, for a business owner these plans are a poor investment when compared to investing in your own business (not only your present business or practice, but additional businesses).

My reasons for this statement are complex. They begin with the fact I have had the unusual opportunity to track the investments (and results of those investments) of hundreds of people for a period of over forty years. Before I explain in more detail, let me describe some examples which illustrate what I am trying to say. 

One of my clients was ready to send his son off to college at Colorado State University. His son had a hobby of photography, so we set up a photography business in Fort Collins, Colorado (where CSU is located). We purchased a building which was used both as a photography studio and an apartment for his son in which to live while he went to school. This was a legitimate business (the son took pictures for the school paper, fraternity and sorority functions, and the school yearbook). AND it enabled my client to fund his son’s education with major tax advantages. The business was successful enough that it was sold (along with the building) when the son graduated. When it was all done, my client actually made a profit from sending his son to college.

Another of my clients is a successful Doctor, who also happens to own some horses and other animals. My client found that he had a hard time finding a competent source of feed for his animals. So, I helped him set up a young man in a feed store business. My client purchased the land, built a 4,000 square foot store and purchased the initial inventory. The young man was given the opportunity to run the store and offered the opportunity to purchase the land, store, and inventory as he proved himself faithful. My client more than doubled his money in five years and he has gone on to set up others in businesses in a similar fashion.

Another of my clients was the founder of a high-tech firm in Boulder, Colorado. I helped turn his ownership in his business into a living trust that produced enough income to totally support him and his wife on the mission field in China.

Another of my clients loves to fly private planes. He was renting a plane and flying when he could. I helped him set up a business where he could use a plane as a business expense (100%). He purchased his own plane and now enjoys flying all over the country on business (with some good fishing included).

Another of my clients loves to golf. I helped him set up a business where he makes custom made golf clubs in his garage. Now he travels and plays the best golf courses all over the world while showing, demonstrating and selling his custom made clubs.

Another of my clients (a dentist) likes to “play cowboy” on the weekends. I helped him start a quarter horse ranch providing horses for rodeos. Now, he spends about half his time on the rodeo circuit riding and showing his horses.

Another of my clients has a cattle ranch that loses a lot of money every year. But, it allows my client to live at the ranch, enjoy twenty-six hundred acres of privacy, and offset the profits from his successful insurance business (saving him about $50,000 a year in taxes). And, as a bonus, the property is steadily increasing in value (tax-free). This gives him the flexibility of selling all or part of it whenever he wants.

Another of my clients loves to read and he has quite a library of books. We are in the process of setting him up with a small used bookstore. He will be able to sell his library to his bookstore (for a handsome profit), buy more books, and price the books he wants to keep high enough that it will be worth it to sell them. Meanwhile he will have his own private library and he can “check out” the books as long as he wants (without paying any fines). And if he buys the right books, their value will increase at a rate much higher than the stock-market AND he can insure himself against losses by fire or theft.

FOLLOWING ARE SOME OF THE ADVANTAGES of investing in your business(es) rather than a government controlled retirement plan:

1.  Money invested in your own business(es) can be invested BEFORE taxes are paid on it. This gives you an additional 15% to invest over money invested in a government controlled retirement plan. But, you say, isn’t money invested in government controlled retirement plans a pre-tax deduction? Yes, but it is not the same. Money put into a retirement plan postpones Federal and State Income taxes only. Money invested in your business reduces your Federal and State Income taxes AND your Social Security taxes (which are 15.3%) So, for starters, investing in a government controlled retirement plan costs you 15.3% right now AND it thereby reduces the amount you have to invest by 15.3%. So you lose two ways just to start when you invest in these plans.  

2.  Money invested in your business(es) can be taken out whenever you want, and when you do take it out, you may or may not pay taxes on it. When you take money out of a retirement plan (prior to retirement) you will pay taxes on it AND you will often pay PENALTIES for taking it out. Interestingly, MANY people take money out this way – providing additional revenue for the government. Could it be this is one of the reasons the government encourages these retirement plans? You bet it is.

3.  Money invested in your business(es) is in your control. You can spend it for whatever you want whenever you want (from an airplane to a pencil) as long as it is a legitimate business expense. Money you invest in a government controlled retirement plan must meet the often complex requirements that are part of the plan. In addition, if your retirement plan money is in the Stock Market, you have no control over (not too mention even knowledge of) how your money is used – it may be used to promote pornography or elect someone you would never vote for.

4.  Money invested in your business(es) does not require additional paperwork and records. Money invested in a government controlled retirement plan does require additional paperwork and records that you and/or your accountant have to maintain.

5.  Money that you invest in your business(es) is not readily accessible to the tax-collectors. Money that you invest in a government controlled retirement plan is readily accessible to the tax-collectors. They could in fact pass a law to confiscate all private retirement plans and merge the money with Social Security Funds. (This is actually being discussed by legislators as the Social Security crisis gets closer and closer).

6.  Profits from money that you invest in your business(es) may be converted 100% to capital gains (as in the cases of the Photography business and Feed Store mentioned above). Thus the tax rate is less and the profits are also able to be reinvested with more flexibility. Profits from money you invest in a government controlled retirement plan is can be taxed  as income, not capital gains. The point here is that you can determine how your profits are taxed.

7.  Finally, why put money in a “Retirement Plan” when you should never retire. Retirement is for debts, not people – especially not business owners.

What I have recommended to my clients is FIRST to invest in their existing business, THEN when the existing business needs no more additional investment – invest in other businesses such as some of the examples I just described. If you have debts, you would be better off to use the money you are putting into your government controlled retirement plan – to reduce your debt.

If you are a business owner and you would like to know how to best invest in your business, please click “contact” at the top right of this page or call us at (503) 927-2750 and learn more about how we can help you.