February Ask Advisors Anything: Personal Financial Planning

“So much of my savings are tied up in my business - what are the best ways to diversify for long term growth and retirement?”

To get to a place of stability, entrepreneurs often need to go in with a strong mentality - “failure is not an option.” But even the most brilliant minded entrepreneur can’t control the economy or consistently predict where the winds may blow. You’ve worked too hard to not have a contingency plan.

Enter “diversification” - the theory of not putting all your eggs in one basket. Here are two strategies you might consider for diversifying the concentrated investment you have in your business:

• Start by saving for retirement using tax advantaged retirement accounts and invest in a broadly diversified low cost portfolio. You may consider underweighting the industry that your business is in. Eg if your business is a tech company and that accounts for 50% of your assets, you may want to underweight the tech sector - but don’t go overboard and take it out completely because it will still provide some protection from risk unique to your business.
  
  Look into the pros and cons of i401k (for solo-preneurs), 401k (if your company offers it), Roth & Traditional IRAs (which have income & deductibility restrictions), SIMPLE IRAs, and SEP IRAs. If you max out those accounts, there’s a mess of other strategies you might use next depending on your tax situation, risk tolerance, values, and goals.

• Sell minority shares in your business and invest the proceeds in the broader market. Normally, the realization of gains (from selling appreciated shares in your business) results in capital gains taxes. But when the shareholders you sell to are your employees and you take advantage of the 1042 Rollover, the government allows you to continue deferring those capital gains even after the sale of the shares.
  
  Anyone who’s dabbled in real estate investing knows about 1031 Exchanges, which allow for the rollover of capital gains into a new property. Section 1042 should be as commonplace knowledge in the small business community as 1031 is in the real estate community. In both cases, certain IRS rules must be met.

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  About the Authors:

  Leo Freeman and Hendrix Berry are the Co-Directors of Obran Capital Advisors.