In my last article, I discussed some basics of company retirement plans. You can read that article here.
In this Insights, I will discuss the retirement plan that I recommend most often for businesses that want to provide this much needed benefit. The SIMPLE IRA plan is great for most business owners who want to start a retirement program for their employees, themselves or both.
The SIMPLE IRA is an easy to administer, low-cost, limited fiduciary responsibility retirement plan. It offers a lot of flexibility with investment options and does not require the filing of reports to the government. Yes, it’s really SIMPLE!
For business owners, I like to introduce it from two perspectives. First, as a benefit for them and second, as a cost to the company (a.k.a., employee benefit). Let’s start with the owner’s benefit.
For business owners, they now have an easy way to defer income taxes and diversify their own personal portfolio away from their business ownership. This retirement savings plan is an easy way to start allocating money for the future. A minimum guideline that I use, and I stress minimum, is that you should be saving for retirement at least as long as you plan on being in retirement. For a 50 year old who plans on working until 70 and dying at 90, the math is pretty simple – 20 years. For a 35 year old, retiring at 65 and living until 95, it’s 30 years. Of course, you don’t have to save as much if you start earlier.
You will need to pay yourself (and your spouse, if applicable) a salary and then you will defer a certain amount, as an employee, to the SIMPLE IRA. The contribution limits for employees is $12,000 in 2014. If you are 50 or older, you can defer an additional “catch-up” contribution of $2,500 for a total of $14,500. This is a tax friendly way of socking away an extra $14,500 a year toward retirement.
But wait, there’s more…
You will also have control over the investments, which allow you to be as conservative or aggressive as you deem appropriate.
The SIMPLE IRA is also very cost effective. IRA fees and investment expenses are passed to the employees’ accounts. For the company contribution requirement (yes, it is required), employers have two choices. You can contribute 2 percent of pay for every eligible employee each payroll period, or you can contribute a matching 3 percent of pay for eligible employees who choose to contribute. If they contribute more than 3 percent, you do not have to match any additional amount. If they contribute less than 3 percent, you simply match the amount they contribute. In a worst-case scenario (cost perspective), the company will be required to match 3 percent of employees’ pay. Of course, this is an expense to the company from a tax perspective as well. The 3 percent match is for all employees, including the owners, so that is a little more going into your own account.
To be eligible for a SIMPLE IRA plan, a company must have 100 or fewer employees earning at least $5,000 per year. You can have as little as one employee for those who are self-employed. You cannot add a vesting schedule to the plan, which means that every time you match a payroll contribution, that money belongs to the employee. However, there is no special reporting required to the government. Contributions are shown on their W-2s. There is no special testing for compliance such as the top heavy plan requirements and highly compensated to non-highly compensated ratios of other plans.
Additionally, the company must establish the plan before October 1 to be effective in that year. Administratively, the forms to set up a plan and the enrollment of eligible employees are easy when working with a knowledgeable professional. There are a few options to help the owner customize eligibility requirements.
So, the SIMPLE IRA is simply that, simple! If you are looking to start a retirement plan for your business, it may be the best option to ease your way into a great benefit for employers and employees.
Email me if you would like to receive a pdf with more detailed information on the SIMPLE IRA. Of course, if you would like to chat about your company retirement plan, give me a call.
Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.
Emma Dill - Nov 27, 2023
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