Let’s face it: Everyone’s looking for a smart way to save for retirement. As a business owner, we know you are, but so are your employees. In fact, access to a smart, reliable plan may help you attract more qualified employees. If you’re a small business owner or you’re involved in a start-up, look at setting up a tax-favored retirement plan for yourself and your employees. Several types of plans are eligible for tax advantages.
One of the best-known retirement plan options is the 401(k) plan. It allows employer contributions to be made at the direction of employees. Specifically, the employee can choose to have a certain amount of pay deferred and contributed by the employer on his or her behalf to an individual account. Employee contributions can be made on a pretax basis, which saves them from paying current income tax on the amount they contribute, an attractive perk.
Some things to keep in mind as a business owner: Employers may, or may not, provide matching contributions on behalf of their employees who make elective deferrals to 401(k) plans. Establishing and operating a 401(k) plan means some up-front paperwork and ongoing administrative effort, and matching contributions may be subject to a vesting schedule. In addition, 401(k) plans are subject to IRS testing requirements, so that highly compensated employees don’t contribute too much more than non-highly compensated employees. For 2019, the maximum amount you can contribute to a 401(k) is $19,000, plus a $6,000 “catch-up” amount for those age 50 or older as of December 31, 2019. Also worth noting: Within limits, participants can borrow from a 401(k) account (assuming the plan document permits it).
Managing 401(k) plans can get complicated and mismanaging them puts you at a disadvantage. You can avoid these pitfalls and tests if you adopt a “safe harbor” 401(k) plan.
If you can afford to contribute to your employees’ plans, a “safe harbor” plan simplifies things and helps small business owners avoid the pitfalls of IRS tests regarding traditional 401(k) plans. In a “safe harbor” plan, employer contributions are 100% fully vested when they are made. These contributions may be matching, limited to employees who defer, or made to all employees, regardless of whether they have elective deferrals. If you choose this option, you may maximize your contribution to your own 401(k) without worrying about over-contributing, while also supporting the retirement plans of your employees. If you want to change your current 401(k) plan from traditional to “safe harbor” you can only do this at the start of the new year, so keep that in mind when you’re planning.
Other tax-favored plans
Of course, a 401(k) isn’t your only option. Here’s a quick rundown of two other alternatives that are simpler to set up and administer:
- A Simplified Employee Pension (SEP) IRA. For 2019, the maximum amount of deductible contributions that you can make to an employee’s SEP plan, and that he or she can exclude from income, is the lesser of 25% of compensation or $56,000. Your employees control their individual IRAs and IRA investments.
- A SIMPLE IRA. SIMPLE stands for “Savings Incentive Match Plan for Employees.” A business with 100 or fewer employees can establish a SIMPLE. Under this plan, an IRA is established for each employee, and the employer makes matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The maximum amount you can contribute to a SIMPLE in 2019 is $13,000, plus a $3,000 “catch-up” amount if you’re age 50 or older as of December 31, 2019.
Annual contributions to an SEP plan and a SIMPLE are controlled by special rules and aren’t tied to the normal IRA contribution limits. Neither type of plan requires annual filings or discrimination testing. You can’t borrow from a SEP plan or a SIMPLE.
These are only some of the retirement savings options that may be available to you and your employees. At Fiducial, we make it our business to help you choose the right plan for your business. We’d love to discuss all your retirement plan options and find the one that works best for you. Find a Fiducial location near you and contact us for more information.