Chances are, save for retirement has a near-permanent spot on your to-do list. You know saving for retirement makes sense, but deep down, your retirement plan is to live off (or sell) the business you are busy building today. As a serial entrepreneur, I get it. Saving for retirement is more of an insurance plan than a core strategy.
If that sounds like you, then the Roth 401(k) is ideal. It differs from a traditional 401(k) in that you do not get a tax deduction on contributions. But it also differs from a traditional plan in that you do not pay tax on your investment returns. And it gets better, especially for entrepreneurs: With one easy maneuver, you can eliminate the obligation to ever take distributions from it.
The retirement-account giant Vanguard says that nearly half of the 401(k) plans it handles offer a Roth option, but fewer than 10 percent of folks have signed up. My educated guess is that the pickup is equally slow among entrepreneurs. I think that's a big missed opportunity.
Roth Rules of the Road
Though there are income limits on who can make direct contributions to a Roth IRA, there is no such hurdle with the Roth 401(k). That provides a front-door opportunity for high-income entrepreneurs to create a tax-free income flow in retirement.
Besides, even if you are eligible to contribute directly to a Roth IRA (which means a modified adjusted gross income below $112,000 for individuals and $178,000 for married couples filing a joint tax return), the maximum you can set aside this year is just $5,500 if you are younger than 50, and $6,500 if you are older.
You can invest much more in 401(k)s. The base contribution limit to a 401(k) is $17,500 this year; anyone at least 50 years old can tuck away $23,000. Those are the same limits as with a traditional 401(k). Entrepreneurs under age 50 without employees (other than a spouse) can contribute as much as $51,000 this year in a special breed of these retirement plans called a Solo 401(k) or Individual 401(k). That's a whole lot more security building than $5,500.
The Later-Year Payoff
Come age 70 and a half, you must make annual required minimum distributions, or RMDs, from traditional retirement accounts, and those distributions are treated as ordinary income. That's going to boost your adjusted gross income, which could push your marginal tax rate higher. This year, as I probably don't have to tell you, the top marginal tax rate bumped up to 39.6 percent.
If you have seen any celebrity news stories lately, chances are you’ve heard about the 50 Cent bankruptcy story. The famed rapper and music mogul shocked fans around the globe when he announced he would be filing for bankruptcy.
In the overlapping worlds of business and politics are a substantial group of billionaire capitalists who have used their government connections to grow richer still, according to a new study from researchers at Columbia and Villanova universities.
“Always” is always a dangerous word in investing, but here’s a good time to use it: Always own some stocks of profitless good firms. Some are turnarounds. Others fund growth through legally deductible futuristic expenses that mask profitability while avoiding taxes. Both needlessly confuse and scare off most investors, who are guided solely, mostly or too much by earnings.
As a result, these underappreciated firms get bid up as they otherwise progress in the real-world marketplace. When I had nothing and had nothing to lose, these were the only kind I bought. While you don’t want profitless bad companies, of course, the profitless good firm is a beautiful thing to behold.
Case in point: I last recommended Amazon (AMZN, 482) in January 2013 at $258. This July, on the 24th Forbes Cruise for Investors, I was asked how it can be worth more than $200 billion yet never earn material profits? First, if it did, it would pay material taxes. Why are taxes good? Second, it still self-funds strong sales growth with an okay balance sheet. Third, it’s at only 2.5 times revenue, cheap for any real growth stock.
But the killer? More and more it simply dominates retailing. Whatever it is, if it isn’t on Amazon you probably don’t need it (except securities–and probably even them soon). Don’t believe me? Try searching for bizarre esoterica you expect only in a niche specialty store far, far away. Profits later; dominance now! Amazon is an “old tech” name yet merely 21 years young, barely drinking age. As such, this huge category killer fits perfectly into my vision of “old tech” leading this bull market’s golden years.
So do I just have my head in the clouds? Well, surely for Salesforce.com CRM -0.08%. It’s a perfect pure play on the cloud, providing enterprise cloud-computing solutions for business. I first recommended it at $33 in April 2011. It has compounded more than 20% a year since while never really earning any money. That should continue as its customer relationship management (CRM) technology and “software as a service” keep gaining credence. For those value-prone: Its price-to-revenue ratio is now far less than what it was when I recommended it in 2011.