Family Business Money Matters (How to Responsibly Quit your Day Job)

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Last year we bought an RV and Nate quit his day job, prompting a bunch of people to ask if we were ditching the traditional American dream altogether. Nope! We love the comfort of home AND we love to travel. But the big question is paying for it all. While we’re not clients, we’re partnering with John Hancock to share what we’ve learned, and how we manage our family business while keeping an eye on finances and retirement.

Making Family Business Fun and Secure

First, Get on Top of Family Finances

We create a budget every year, gathering a list of our current obligations and comparing that to our average income. We go line-by-line looking at where we can save, which services we can ditch, and what we can delegate that will free up time and increase efficiencies.

Brace Yourself for Challenges

Before you think about going full time into your family business, make sure you have a solid savings account. We always keep enough in the bank to cover between three to six months worth of expenses – just in case!

Business Insurance

Next, before we even remotely considered retirement and savings options, we got business insurance taken care of. If you’re part of a family business or work as an entrepreneur in any capacity, it’s critical that you have liability insurance. You may also need property insurance to cover your equipment, worker’s compensation, and business interruption coverage. Talk to your agent about your options. If they don’t have good answers…find a new agent.

Manage Pre-Existing Funds

Do you have retirement funds set aside from a previous job? Talk to an expert to make sure that money’s being handled correctly. You may be able to roll it all into a better fund. Nate is fortunate to have a pension plan thanks to his previous law enforcement job – BUT it’s in California, where pension plans are at risk due to severe underfunding. Cashing out a pension in a lump sum isn’t usually seen as a great idea since it’s “guaranteed money.” Guaranteed, that is, unless the pension system fails.

It’s worth putting some serious thought and calculations into the amount you’ll potentially accumulate month-after-month with your existing pension plan versus rolling that into a different investment.

IRA Considerations

Many people want to move pre-existing money away from a fund that’s tied to a previous job, so they can have more control over their money. IRAs are usually the first option people look at, because they’re easy to establish and don’t need to be tied to a business (unlike most 401Ks, which are more complicated).

Real estate investments are wildly popular with our family business -owning pals (I think it speaks to their desire to be in control of their financial destiny with tangible goods). People like that often question if they can put their IRA towards the purchase of property. The answer: sort of. Aside from the ability for first-time homebuyers to “borrow” from their IRA, IRAs can also be used to purchase rental property. However, the IRA owner can’t receive any benefit from the purchase – you can’t squeeze a vacation home into this scenario! Further, all maintenance and upgrades to the property as well as income must come directly in and out of the IRA. It’s tricky.

SEPP payments are also an option to look at, if you’re wanting access to your money without paying penalties. The IRS allows people under the age of 59 ½ (typical retirement age) to withdraw “substantially equal periodic payments” from their individual IRAs until the person turns 59 ½ or for a minimum of 5 years – whichever comes first.

Best Options for Family Business Funds

Having considered pre-existing funds, budgets and loan consolidations to get your personal finances in order, now’s the time to look toward the future of your family business. We met with a John Hancock financial planner to chat about our best options moving forward. For almost all self-employed individuals, the choices are clear: you’ll want to establish a SEP IRA or a Solo 401K.


If you’ve established a corporation for your business (and you should – LLCs can offer decreased federal tax rates and protection for your personal assets) then your business can contribute up to 25% of your salary into an IRA, up to $56,000. There is one caveat, though: the business must contribute equally for all employees who are 21 or older and earned $600 or more in the past year, and have worked for the business for 3 out of the last 5 years.

A SEP IRA does not offer employee contributions: all money put into the IRA is contributed by the business and can be written off as a business expense. They’re easier to setup than a Solo 401K. In terms of tax write-offs, this choice makes the most sense if your income is over $220,000. One important thing to note is that you cannot take a loan against your SEP IRA.

SOLO 401Ks

Solo 401Ks are only available to business owners, spouses involved in the business, and partners: you can exclude any employee who works fewer than 1,000 hours per year. Here, employers can still contribute up to 25% of your salary annually. Employees can kick funds in up to $19,000 ($25,000 for those over 50) and there are employer profit sharing contribution options that bring the maximum annual contributions up to $56,000 (or $62,000 for those over 50). In terms of tax write-offs, this choice makes the most sense if your income is under $220,000 because you can contribute more pre-tax money.

For what it’s worth, we chose to go with a Solo 401K because we do have part-time employees and we don’t want to be contributing to all their retirements.

Consider your State of Residence

There’s a dang good reason why retirees tend to flock to certain states. Nate and I have noticed a bizarre amount of our older friends moving away. After doing a little digging, the answer is crystal clear: tax benefits. Some states offer great tax advantages for businesses and retirees. Nevada, for example, has no state income tax, whereas in California we pay up to 12.3% (the highest state income tax in the country). Some states have exemptions for retirement income, but not all.

Since our business is primarily done online and we already travel over half the year, our John Hancock financial advisor shared that we may want to consider relocating out of our current state to a more tax-advantaged area. If you have that sort of flexibility, look at the numbers closely. Depending on your income and your tax rate, you may be able to afford the payment on a second home elsewhere with the amount you’re currently paying in state income taxes!

Do you have any other questions about the finances behind a family business? You might be a good candidate for a John Hancock consultation!


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