By Joan B. Kaye, Senior Vice President and Relationship Manager, Key Private Bank
Auto dealer owners are often so busy running their business they fail to take a pitstop to prepare for their own retirement. But counting on the future sale of the dealership to fund a comfortable retirement may not be enough. Just as you would routinely service a car, it’s important to carve out time to examine your retirement readiness.
Dealership owners have a wide array of retirement planning options available designed to meet their needs and those of the business. In fact, many of the available options can help auto dealership owners reduce taxes, attract and retain talented employees, and steer toward a more secure retirement.
Let’s look at some of the planning opportunities.
The Retirement Highway: Three Lanes of Planning
Retirement planning for dealership owners is like a three-lane highway.
The first lane includes traditional retirement planning concepts, such as profit-sharing plans and defined contribution plans (401(k)s, SEPs, and Simple and traditional IRAs). This lane of planning allows the dealership owner and employees to contribute slowly and steadily to retirement savings, often in a tax-efficient manner. These traditional plans are often the first step to fueling retirement savings.
The second lane of retirement planning for auto dealership owners begins to focus on more crucial key employees, including owners themselves. This typically involves more advanced strategies, such as nonqualified deferred compensation.
The third lane of retirement planning for dealership owners is the use of the business assets as a source of income in retirement. This is accomplished through the proper transition or sale of the dealership.
The greatest opportunities for dealership owners to build a more secure retirement are primarily in the first two lanes of the highway. Let’s take a closer look at these options.
Revving the Engine with Nonqualified Deferred Compensation
A nonqualified deferred compensation arrangement is an agreement between the dealership owner and select company leaders to pay them retirement or other benefits in the future. These plans are typically used to add extra mileage to executive retirement benefits by offering a second tier of benefits to the existing qualified retirement plan.
Nonqualified deferred compensation plans, which are often overlooked by auto dealership owners, can give key employees a strong incentive to remain committed to the company, as well as attract key talent in the future. They can also help owners bridge the gap between traditional qualified plans and business sale or transition strategies to help fund a more secure retirement.
This type of plan offers several benefits for the dealership owner and key employees. First, it creates additional income during retirement for top employees. Second, it allows the dealership to provide an additional benefit to key employees without having to include all workers or incur the administrative costs associated with qualified plans. Finally, the possible deferral of income taxes to later years may benefit those individuals who are currently in a higher tax bracket.
Several common nonqualified deferred compensation plan designs exist today and can be implemented based on the needs of the owner and his or her dealership. These include supplemental executive retirement plans (SERPs), death benefit only plans, salary reduction plans, 162 bonus plans and split dollar life insurance (both which use life insurance as a means of compensation and deferral of taxes on income and earnings), among others.
Auto dealership owners should keep in mind that some of these plans are considered corporate assets and are therefore susceptible to creditors in the event of a bankruptcy. The financial stability of the company should be carefully reviewed. The auto dealership owner may also want to work with a financial professional who has the knowledge and expertise to help them implement a nonqualified deferred compensation plan based on their objectives and the tax structure of their business.
Speed Up to Slow Down: Selling or Transitioning the Dealership
Before shifting gears to fund a portion of their retirement with the sale or transition of the company, auto dealership owners need to answer two critical questions:
- What is the value of my dealership?
- How will the sale of my dealership occur?
Most auto dealership owners have a general idea of what they think their company is worth. Unless a valuation has recently been performed, however, the value may be significantly different from what the owner has in mind. The value of the dealership is a key component of how much additional income will be available in retirement. As retirement age approaches and an auto dealership owner considers the transition of the company, formal valuations of the business are necessary. This information is crucial to the sale and future retirement planning.
Once the decision has been made to sell a dealership, ensuring a thoughtful transition strategy is in place is essential. Perhaps a buy/sell arrangement was implemented in earlier years or a competitor company is interested in a purchase.
Whatever the approach to exit, how the proceeds are used will have a huge impact on an auto dealership owner’s retirement income. Not only is it important to plan for the sale and use of the sales proceeds, but it is also critical plan for the protection of the newly acquired assets. A liquidity event like a dealership sale will likely cause estate and income tax issues. Implementing solutions to mitigate tax issues and protect wealth are essential to safeguarding the dealership owner’s retirement.
Fueling the Future
Auto dealership owners all have different ideas about how they want to spend retirement. But most owners would like to have enough to retire when they want and want to ensure their money lasts through retirement. Designing a retirement planning strategy early on can help dealership owners take the wheel and seize all the opportunities available to help the business succeed, ensuring a smooth ride into retirement.
Joan B. Kaye is senior vice president and relationship manager with Key Private Bank. She can be reached at Joan_B_Kaye@KeyBank.com or 1-516-660-9851.
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2019 CFMA #190307-552740
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