For many business owners, retained earnings in a business can be both a blessing and a curse. On the one hand, having excess cash speaks to the success of the company and the management, but on the other it can be challenging to take the earnings out of the business without potentially incurring a large tax bill.
There is, however, a strategy available that allows a business owner to pull those earnings out of business without any net tax cost. This concept involves a personal investment loan whereby you fund the interest costs with a withdrawal from the business. This allows not only for a tax neutral withdrawal from the business, it allows you to compound a lump sum investment account purchased from the proceeds of the loan, and reduces the risk to the retained earnings from creditors.
This simple strategy assumes that the $200,000.00 loan proceeds are placed in an investment portfolio where the interest costs on the loan are facilitated by a draw from the corporation as a salary or bonus. Seems simple enough, but does it get you any further ahead?
As demonstrated, assuming an interest rate of 4% on the loan and an average rate of return of 5% on the investment portfolio, the after tax net gain shows that this strategy can potentially provide a tax efficient way to use the retained earnings held in a corporation without having to withdraw them.
While this strategy may be appropriate for your company, we recommend that you review your personal situation with your tax specialist. At Insightful Wealth Group we work closely with our clients and their tax advisors as part of our integrated wealth management process, and take the time to thoroughly understand each individual’s circumstances to ensure we are helping them to plan accordingly. With a team devoted exclusively to delivering comprehensive strategies and sophisticated solutions, we invite you come and talk to us about to determine what strategies and options will best suit your wealth management needs.