Expert Advice to Help Build &

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Ask most people why they work so hard. The answer will usually go back to building a good future for themselves and their family. But it is also common for business owners to admit that their money is tied-up in their companies, and so they think that they cannot pull their money out.

On one end, the business owner can be proud of his company’s success and profitability that is reflected by his retained earnings. But on the other end, he cannot enjoy his money without incurring a huge tax bill.

There is now an innovative concept available today that is called the retained earnings strategy. It allows the business owner to move his retained earnings from the company to generate investment returns in a tax efficient way.

Retained Earnings Strategy

The way it works is quite simple. The business owner can take out an investment loan and use his retained earnings to pay for the interest on the loan. Since interest payments are tax deductible, the strategy allows him to withdraw from his retained earnings without tax deductions. It also gives a person the opportunity to expand his capital and diversify his investment.

Below is a step-by-step account of how the process might go:

1.    He takes out an investment loan. The guarantee, security, or collateral for this loan will come from the person and not the corporation due to tax implications.
2.    The amount of the loan is applied in a lump sum.
3.    The corporation pays the business owner an amount equal to the interest of the loan to fund the interest payments. This will be included in income.
4.    The owner deducts the interest payments at his marginal tax rate. And he ends up investing in a segregated fund contract.

Split Dollar Life Insurance

Since we are on the topic of getting the most from retained earnings, let us take a few moments to discuss the split dollar strategy.

Split-dollar insurance is a strategy whereby the company pays for a part, if not all, of the owner’s life insurance policy. It is an agreement that when the policyholder dies, the company receives the portion of the death benefit equal to the amount it paid in premiums. The rest goes to the owner’s beneficiaries.