Dodge Taxes Legally

Interested in putting away money on a deductible basis, and then using that money tax-free even before retirement? You cannot do that with an IRA, profit sharing, a 401(k) or a defined-benefit retirement plan. But there is a way to deduct a buy-sell agreement, a business succession or estate plan. There is a way to deduct expenses that are not normally deductible for a business, such as life insurance. It’s called Volumtary Employee Benefits Associations, or VEBA.

When I spoke at the Car Care World Expo in Vegas earlier this year, my most popular topic was the VEBA. Profitable businesses looking to substantially reduce their tax liabilities and provide other benefits can use a VEBA. Although they have been in existence for years, VEBAs are not widely known or well understood. They allow an employer to receive a current tax deduction while putting away funds not currently needed. They also give an employer a great deal of latitude in choosing both present and future plan benefits.

Additional benefits of VEBAs include the protection of assets from creditors, tremendous flexibility in establishing contribution amounts, and highly favorable monetary benefits for the business owner. Also, a plan can allow you to deduct insurance premiums for life, health, disability and long-term care, and solve retained-earnings problems. An employer can have a retirement plan and a VEBA simultaneously. And a VEBA allows for larger flexible tax-deductible contributions than a 401(k) plan.

The problem with a retirement plan is that, live or die, when the money comes out, it is taxable. Who says you will be in a lower tax bracket when you retire? When you die, not only will your retirement money be subject to income tax, but it may also be subject to estate taxes. Money in a VEBA can be withdrawn income-free and estate-tax-free for benefits. It is never too early or too late for successful business owners to consider these things.

You do need to be careful, however. Numerous plans look like VEBAs but do not meet the well-established and specific guidelines of the Internal Revenue Service. Using a look-alike plan as though it were a true VEBA can get you into serious trouble.

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