Finding the ‘Goldilocks’ Retirement Plan
Where do you set aside the money you’re saving for
retirement? If you’re like many Americans, you save for retirement
primarily through an employer’s retirement plan, according to Pew Research.1
Unfortunately, less than one-half of private sector employers sponsor retirement plans. Firms that have plans tend to be large.1
In
part, that may be because of a misperception among smaller employers.
Many small companies think sponsoring a retirement plan is too
expensive. However, 45 percent of smaller employers have never
researched retirement plans and just 23 percent have researched any
options other than 401(k) plans, reported the 2018 Millennium Trust Small Business Retirement Survey.2
The fact is there are workplace retirement plan options developed specifically for smaller employers. These include:
•
Savings Incentive Match Plans for Employees (SIMPLE) IRA Plan.
Employers with fewer than 100 employees that have no workplace
retirement plan can sponsor SIMPLE IRA Plans. They’re easy to
administer, salary reduction plans that have no filing requirements.3
While
there are exceptions, generally, all employees who were paid $5,000 or
more during any two preceding calendar years, and who are expected to
receive $5,000 or more during the calendar year, are eligible to
participate. Employees decide if and how much to contribute.
Contributions are made to IRA accounts, which are subject to the same
investment, distribution, and rollover rules as Traditional IRAs.3, 4
Employers
must make either a matching contributions or a non-elective
contribution to employees’ accounts each year. Employer contributions to
SIMPLE Plans may be deductible.5, 6
The pros and cons, according to the IRS, for SIMPLE Plans include:7
• They are easy and inexpensive to set up and operate.
• Employees share responsibility for their retirement preparations.
• No discrimination testing is required.
• Employer contributions are inflexible.
• The plan has lower contribution limits than some other retirement plans.
In
addition, employers may be able to claim a tax credit equal to 50
percent of eligible startup costs, up to a maximum of $500 per year, for
the first three years of plan operation.8
•
Simplified Employee Pension (SEP) IRA Plan. Employers of all sizes can
put a SEP Plan in place. Like SIMPLE Plans, they’re easy to administer,
salary reduction plans that have no filing requirements.9
While
there are exceptions, typically, any employee who is 21 or older, has
worked for the company during three of the previous five years, and been
paid $600 or more, may be eligible to participate.10
Employers
make all contributions to SEP Plans. When employers choose to make
contributions, they must contribute the same percentage of compensation
to every employee’s IRA account. Employer contributions to SEP Plans may
be deductible.9, 11
The pros and cons, according to the IRS, for SEP Plans include:7
• They are easy to set up and operate.
• They have low administrative costs.
• Employer contributions are flexible because the employer chooses when to contribute.
• Employers must contribute equally for all eligible employees.
Again, employers may be eligible for a plan start-up tax credit.
•
Payroll Deduction IRA Plan. This may be the simplest workplace
retirement plan option. There are no plan documents and no filing
requirements. All the employer is required to do is transmit the
authorized amount to IRA accounts that have been established by
employees.12
Employees make all contributions to
payroll deduction IRA Plans. Each employee is also responsible for
choosing the financial institution and establishing the IRA account that
will receive contributions.12
The pros and cons, according to the IRS, for IRA Payroll Deduction Plans include:12
• They are easy to set up and operate.
• There is little administrative burden or cost.
• Employees may not perceive the plan to be a benefit.
• There is no deduction for the business.
• Employees may or may not be able to deduct their contributions.
If
you own or work for a small business that doesn’t currently provide
employees with a way to save for retirement, a 401(k) plan is not the
only option. If retirement is on your mind, it may be a good idea to
educate your employer about the retirement plan options available to
small businesses.
You also can save on your own in an Individual
Retirement Account (IRA). It’s surprising when so many people are
concerned about retirement, but relatively few American households (15
percent) contribute to IRAs outside of work.1
If you
don’t have a workplace plan, setting up an IRA and automatically
transferring funds from a checking or savings account is a good way to
save for the future.
If you would like to learn more, please give us a call.
Sources:
1 https://www.pewtrusts.org/en/about/news-room/opinion/2019/03/14/3-ways-people-may-save-for-retirement-in-the-future
2 https://marketing.mtrustcompany.com/acton/media/19203/2018-small-business
3 https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-establishing-a-simple-ira-plan
4 https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-participation
5 https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-contributions
6 https://www.irs.gov/retirement-plans/operating-a-simple-ira-plan
7 https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan
8 https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit
9 https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-sep
10 https://www.irs.gov/retirement-plans/plan-participant-employee/who-can-participate-in-a-sep-or-sarsep-plan
11 https://www.irs.gov/retirement-plans/operating-a-sep
12 https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-payroll-deduction-ira
This material was prepared by Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer.
The
opinions voiced in this material are for general information only and
are not intended to provide specific advice or recommendations for any
individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing.
This
is not intended to be a substitute for specific individualized tax
advice. It is suggested you discuss your specific tax issues with a
qualified tax advisor.