Duane J. Silbernagel
Waddell & Reed
The Small Business Retirement Plan Guide
By: Duane Silbernagel
If you own a business, or are self-employed and haven’t established a retirement plan yet, why wait any longer? In today’s economy, talent can be hard to come by. Establishing a company retirement plan may give your business a leg up in recruiting new talent as well as retaining current talent. As business owners, decisions are based on the absolute raw numbers. Always analyzing such metrics as new customer acquisition costs (what do I have to spend to bring in one client)? As this is measured, one must also be concerned about the cost to maintain the existing customers. If you bring in 5 new customers per day but lose 7 existing customers per day, it’s clear; the business is heading for trouble.
A similar analogy can be used with employees. Bringing on new talent is a challenge – an expensive one at that. The business is taking a risk that this person will learn the internal policies, practices and procedures in a relatively short time frame, and be productive in the near future. However, if your current talent leaves at a more rapid rate than new talent can be brought in to replace them, the business can be in a tough spot.
By putting a retirement plan in place, you’ll give your existing talent an avenue to save for their future and (depending on plan type) potentially an incentive, such as a match or profit-sharing. The options that are available to small business owners seem overwhelming. It turns into a numerical version of alphabet soup: 401(k), 457(f), 403(b), 401(a), 457(b). These codes generally are nothing more than the IRS code section that allows the stated plan. Want to know what is allowed in a 401(k), for example? Check IRS code 401, subsection k.
Each plan has benefits and drawbacks, so the idea is finding one that is most suited to your current situation. Plans can be limited by the number of employees that the business employs, or how much money the business would like to share with the employees. So consider aspects like:
How much money does the business owner wish to save?
How do you want to be able to fund the plan:
Employee contributions only;
Employer contributions only;
What are the tax advantages?
Is there flexibility in the business liability for contributions?
What does one want:
How many investment options does one want to allow?
Avenues to save:
Roth option (post-tax money);
Traditional option (pre-tax money).
How many employees do you have?
Do you have employees that you’d like to give some preference to?
When it comes to small businesses there are generally three choices: SEP IRA’s, SIMPLE IRA’s and 401(k)’s. Now, each of these have benefits and drawbacks.
SEP IRA plans allow a business owner to contribute for themselves and for their eligible employees. Business owners can require that an employee be at or over age 21, and have been employed by the company for at least 3 out of the last five years in order to be eligible for the plan. In order to receive a contribution once they have satisfied eligibility to enter the plan, the employee can also be required to have earned at least $600 in order to receive a company contribution for that year. The company contributions to the employees need to be the same percentage of compensation, or a flat dollar amount in which each employee gets the same amount. Yet, the employer is not required to make yearly contributions; they are discretionary each year. The 2015 limit for SEP contributions is 25% of pay or $53,000, whichever is lower.
SIMPLE IRAs are available to employers with less than 100 eligible employees. Employees have the ability to contribute their own salary tax-deferred to the SIMPLE IRA account. The 2015 salary deferral contribution limit is $12,500, with an additional catch-up contribution of up to $3,000 for people age 50 and over to total $15,500. Yet unlike the SEP, the employer must make an annual company contribution. The company contribution options are: 1) a match of the employee salary deferral contributions up to 3%, or 2) contribute 2% to every eligible employee’s accounts (whether or not they are contributing). With the SIMPLE IRA match contribution, the employer may reduce the percentage to 1% or 2% instead of 3% for 2 years in a 5-year period.
The 401(k) is very popular in the business world. These plans generally allow for both Roth and traditional contributions by the employee. Any company match that is provided, but not required, will be subject to a vesting schedule. For 2015 contribution limits on a 401(k) are $18,000 (under age 50) and $24,000 (over age 50). Administration costs of the 401(k) are generally notable.
There are so many factors that plan into every businesses retirement plan. There is no perfect answer. Retirement plans can be changed or adopted as a current retirement plan may no longer suit the needs of the business. As an employer, you play a vital part in aiding your employees in saving for retirement. Now is the time to put a retirement plan into place for you and your employees.
If you’d like to find out more about me visit my website: www.duane.wrfa.com.
Have an idea for a topic? Email me: DSilbernagel@wradvisors.com.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Waddell & Reed does not provide legal or tax advice. Please consult with a professional regarding your personal situation prior to making any financial related decisions.
Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. He can be reached at (541) 614-1322, via email at DSilbernagel@wradvisors.com.
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