ILMA Compoundings July 2017 - 30

BUSINESS HUB

Preserving the Family Effect
By Mike Fassler and Steve McClure

family leader put it this way
to the non-family CEO: "We
want you to embrace the
value of our family to this business
and help us appropriately utilize the
family effect to make it an even better
business." The non-family CEO
replied: "With respect, the business
and my managers cannot do for
the younger family members what
only the family can do - teach the
principles of merit, stewardship and
accountability."
The family leader's retort: "I can see
how you might think this is solely the
role of the family, but there must be
some ways for management and family

to work together to leverage the benefits of our healthy family relationship,
don't you think?"
Some family leaders feel the only way
or the best way to preserve the family
effect is to employ as many family
members in the business as possible.
While employment of family members
can help preserve the family effect, solely relying on employment to achieve
it can lead to a compromised business
rather than a competitive advantage.
Judicious, responsible nepotism
can be and often is an advantage for
a family firm if it is accompanied by
merit, stewardship and accountability.
Not all family members qualify.

However, the family effect can mean
much more than family employees
who are prepared to contribute. For
family businesses that are into their
second generation and preparing for
the third generation, preserving the
family effect has a lot more to do with
the family members who are not employed in the business, yet are future
owners. A few thoughts about the role
of family and the role of management:
1. Family role: Prepare young
family members for their roles as
engaged owners through reinforcing family commitments to the
business, providing the choice

Pretax, Roth or After-Tax Retirement Plans:
Which Should You Choose?
By Murray Carter
Pretax: Tax benefits now

If your employer offers various retirement plan contributions, how do
you know which to choose? Here are the options:
With pretax contributions, the money is deducted from your paycheck before taxes, which helps reduce your taxable income and the
amount of taxes you pay now. Consider the following example, which
is hypothetical and has been simplified for illustrative purposes.
Mark earns $2,000 every two weeks before taxes. If he contributes nothing to his retirement plan on a pretax basis, the amount
of his pay subject to income taxes would be the full $2,000. If he
was in the 25 percent federal tax bracket, he would pay $500 in
federal income taxes, reducing his take-home pay to $1,500. If he
contributes 10 percent of his income to the plan on a pretax basis - or
$200 - he would reduce the amount of his taxable pay to $1,800.
That would reduce the amount of taxes due to $450. After accounting
for both federal taxes and his plan contribution, Mark's take-home pay
would be $1,350. The bottom line? Mark would be able to invest $200
toward his future but reduce his take-home pay by just $150. That's the
benefit of pretax contributions.

JULY 2017

| COMPOUNDINGS | ILMA.ORG

In addition, any earnings made on pretax contributions grow on
a tax-deferred basis. That means you don't have to pay taxes on
any gains each year, as you would in a taxable investment account.
However, those tax benefits won't go on forever. Any money withdrawn from a tax-deferred account is subject to ordinary income
taxes, and if the withdrawal takes place before age 59.5 (or 55 or
50, depending on your plan's rules), you may be subject to an additional 10 percent penalty on the total amount of the distribution.

Roth: Tax benefits down the road
Contributing to an employer-sponsored Roth account offers different benefits. Roth contributions are considered "after-tax," so
you won't reduce the amount of current income subject to taxes.
But qualified distributions down the road will be tax-free.
A qualified Roth distribution is one that occurs:
* After a five-year holding period and
* Upon death, disability or reaching age 59.5
Nonqualified distributions are subject to regular income taxes
and a possible 10 percent penalty tax. However, because Roth
contributions are made with after-tax dollars, a distinction is
made between the portion of the distribution that represents

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ILMA Compoundings July 2017

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