Retirement Planning – Minimize taxes now and save for the future
Commercial fishing is ever-changing, dynamic, and demands our attention as skippers. This often puts retirement planning in last place on our to-do lists. However, we all love to reduce current year taxes, and retirement planning can accomplish that. Furthermore, there will come a day when our fishing careers end, and we will need to live off the decades of hard work we’ve spent in the yards and on the water. How do you start now to ensure you’ll have enough and help minimize taxes along the way?
There is no one-size-fits-all approach to retirement planning for commercial fishermen. The most fitting techniques can vary year to year, depending on your income and tax situation. Self-directed Traditional IRAs and Roth IRAs are covered all over the internet, so we will focus on more exclusive and impactful strategies available to business-owning captains. Let’s go through a few of the options:
Solo 401ks – This is an opportunity that skippers really shouldn’t miss and is the premier way to reduce taxable income AND invest for your retirement. The contribution limits have a high ceiling AND are tax-deductible. Regardless of your income, you can contribute. The total contribution consists of two portions: Employee and Employer.
Employee portion: can be $19,000 in 2020. If you are over 50, you can contribute another $6,500 for a total of $25,000.
Employer portion: Slightly trickier; this can be 25% of your salary (i.e., W-2 wages) up to the max of $37,000 (which would mean your salary was $148,000).
Between both of these contribution types, your max total contribution can be $57,000 (plus $6,500 if you are over 50) for YR2020.
Roth Solo 401k – A typical Roth IRA has inhibitive income limits, i.e., if your taxable income in a given year is under approximately $130,000 (single) or $200,000 (married), you cannot contribute. However, Roth Solo 401ks have all the same tax rules (contributions are NOT tax-deductible, but withdrawals are tax-free if you are over 59 ½ ) and flexibility (contributions can be withdrawn at any time) of Roth IRAs BUT, there is no income limit for contributions. Regardless of your income, you can contribute. This is a unique opportunity for skippers compared to the typical Roth IRA investor.
Contribution limits are limited to the employee portion only (see above), so a max of $19,000-25,000 (age-dependent). This maximum can be split between the Solo 401k and the Roth Solo 401k as you wish, but the max remains the same.
The benefit of Roth Solo 401ks is that any money you save there will never be taxed when withdrawn. What you see is what you get.
Strategies – generally speaking, your income/tax situation will be the key drivers to nudge you towards tax-deductible contributions (Solo 401k) or non-tax-deductible contributions (Roth Solo 401k) in any given year. A high-income year would encourage Solo 401k contributions because you are preventing taxable income at higher rates. A lower-income year would encourage Roth Solo 401k contributions because you could take advantage of lower rates this year.
Keep in mind; income means ALL income types (other work/business, short-term capital gains, etc.), so your overall situation is what matters, not just this year’s fishing.
Another factor is timing. Perhaps you won’t know your income/tax situation in full until after the April tax deadline. That’s okay; you can extend your tax filing until September or October and still contribute before then. Your Solo 401k just needs to be established before the calendar year is over.
Case Study:
Roger has a good year in 2020 and earns $200,000 (net of crew shares & expenses) in his fishing business. He takes $176,000 as profit sharing and pays himself $24,000 as his skipper salary. He is single and would be in the 32% federal marginal tax bracket. He is a resident of Washington and has no state income tax.
He decides to contribute $25,000 to his Solo 401k, bringing his total taxable income down to $175,000. He contributes $19,000 for his employee portion, and $6,000 for his employer portion. This prevents $25,000 from being taxed at 32% and thus saved him $8,000 in taxes this year. If Roger lived in a high tax state like California, the tax savings would be even larger.
Retirement planning is not just for your retirement years. It should also be looked at as a huge benefit to reduce current year taxable income and tax liabilities. As commercial fishermen and often solo business owners, there is a lot of unique opportunity to take advantage of with the right financial planning.
About Robert
Robert Seid is a financial advisor and Partner at Blue Summit Wealth Management, an independent wealth advisory firm in San Diego, CA. He also captains an Alaska commercial fishing vessel in Bristol Bay. His experience in both industries provides him the perspective to share financial guidance specifically geared for commercial fishermen. To learn more about how Robert and Blue Summit can help you and your operation succeed, please visit www.bluesummitwealth.com.
Robert started in the Bristol Bay fishery in 2011 as a green crew member, walking the yards to find his first opportunity. His love for nature and adventure found a home in Bristol Bay and, after his first year on the water, he was hooked. He has returned every year since and purchased his own vessel in 2019. As a skipper, his dedication to commercial fishing has only continued to grow.
