When you decide that the time has come to hang up your hard hat and embrace retirement, you will be confronted with many options for stepping away. One option, which many business owners are unaware of, is to utilize a cash balance buyout to sell your shares of the company to younger members.
In this two-part series, our Birmingham construction lawyers will introduce cash balance buyouts and discuss how contractors and business owners can use them to procure the best retirement plan possible. At Cotney Construction Law, our experienced construction lawyers take practical knowledge from their former jobs related to construction and combine it with comprehensive legal know-how to give contractors unparalleled service when selling a business or dealing with other legal matters including lien law, bond law, license defense, and more.
What is a Cash Balance Buyout?
When you decide to sell your shares of a company, it can be difficult to negotiate a deal that satisfies your needs and the needs of the buyer. After all, you know the worth of your shares and want to capitalize, but at the same time, the buyer wants to get the best possible deal. If you want to exit your company in the context of a win-win situation, a cash balance buyout can help relieve you of your shares while boosting your retirement plan payouts.
To achieve this goal, you should consider using a cash-balance plan, which is a special type of retirement hybrid that combines the buy-out with an existing 401(k) plan to boost annual payouts significantly. If you are in your 60s or older, you can reportedly acquire annual payouts of up to $150,000 per year.
What are the Major Benefits of a Cash Balance Buyout?
When younger owners attempt to purchase shares from a retiring owner, they typically need to figure out a way to acquire after-tax dollars to complete the transaction. Unfortunately, this isn’t as simple as it seems. If a younger owner wants to make a payment of $500,000, they will really spend closer to $1,000,000 since these dollars are taxed at capital gains rates. Since many older owners have a cost basis of zero, the entire payment is taxed at the capital gains rate. In other words, over half of the money needed to start this transaction will be paid in taxes.
When you opt to utilize a cash-balance plan, the contributions become a tax-deductible expense for the company and its owners. This benefits you, the seller, because all deposits are tax-deferred until you begin to spend the money later in retirement. Plus, this money can be invested into a compounding fund on the same tax-deferred basis which effectively mitigates the tax costs if handled correctly. Meanwhile, the buyer gets a more affordable purchasing option.
To learn more about utilizing a cash balance buyout to sell your construction company shares, read part two.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.