As a business owner, you’re partially responsible for the livelihood of your employees. That includes the immediate salary they get, as well as their opportunity to save toward retirement. Setting up a company retirement plan becomes an important feature to take care of your current employees — and to provide a comprehensive, competitive benefits package that attracts and retains new team members.
The quality of your company’s retirement plan is measured by how much impact it has. Different plans allow employers to offer different benefits (i.e., company matches, profit-sharing, etc.) Overall, by setting up a company retirement plan, you’re helping your employees invest in their own future. And, without doubt, that is a great thing for them.
Now, you may be thinking, “Well, what’s in it for me?” That is a valid question.
Let’s dive into it.
First, setting up a retirement plan for the business automatically means that you’re setting one up for yourself.
Many business owners bank on their business being their de facto retirement plan. They reinvest most of the money into the business — and are generally willing to do whatever it takes to grow the business. There’s nothing wrong with this approach, because your business is important. However, by establishing a retirement plan, business owners can begin to diversify and invest in things outside of their business.
Second, the IRS rewards business owners that implement a retirement plan in their business through several tax break opportunities. Depending on the chosen plan, business owners can receive tax deductions when contributing to employees’ retirement plans.
Finally, investing for retirement usually has minimal downside. You can sock away money for the future, receive the tax benefits that come with the specified plan, and experience compound interest with the growth of the stock market. Depending on how long you have until retirement, capital gains and compound interest can add a significant amount of growth to your balance as compared to regular savings.
Depending on the type of plan (we included a few examples below), you can receive tax deductions for employer contributions, tax-deferred growth on your own investments, and the opportunity to attract and retain top talent by offering a competitive plan structure.
Strategy: Profit-Sharing Plan
A profit-sharing plan is a defined contribution plan designed to let employers make discretionary contributions toward their employee’s retirement.
Advantages:
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- Allows for discretionary contributions
- Flexible funding options
- Employers can change how much they contribute year-to-year
- Can create unity inside the company
- Competitive advantage when hiring
Caution:
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- Can potentially contribute to unfair compensation
- Business needs available profits in order to fund this
- Employees cannot contribute, all responsibility is on employer
- Admin costs can be higher than some of the other, more straightforward retirement plans
Savings Range:
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- Tax rate at contribution
Contribution limits:
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- The lesser of 25% of the employee’s compensation, or $58,000 ($64,500 including catch up 401(k) contributions) for 2021
Strategy: Traditional 401(k)
A traditional 401(k) plan is a qualified employer-sponsored retirement plan that allows eligible employees to make pre- or post-tax salary-deferral contributions.
Advantages:
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- Allows for company match
- Can deduct employer contributions
- Tax-deductible contributions for employees
Caution:
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- Be aware of administration fees from plan provider
Savings Range:
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- Tax rate at contribution
Contributions limits:
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- Total contributions by both an employee and an employer cannot exceed $58,000 in 2021 ($64,500 for catch up)
Strategy: Roth 401(k)
A Roth 401(k) is an employer-sponsored retirement plan that allows employees to contribute post-tax money up to the plan’s contribution limits.
Advantages:
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- Invest after-tax funds to receive tax-free growth and tax-free distributions at retirement age (59.5 years)
Caution:
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- Be aware of administration fees from plan provider
Savings Range:
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- Tax rate at retirement
Contribution limits:
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- Total contributions by both an employee and an employer cannot exceed $58,000 in 2021 ($64,500 for catch up)
Good Business: Retirement Plans for Small Business Owners
Setting up a company retirement plan may be one of the best decisions you make as a small business owner. It provides many advantages to you, to the business, and to your employees. However, managing a retirement plan can be time-consuming. It may be worth considering outsourcing plan administration to an outside provider.
When doing this, it’s important to ask a couple questions:
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- What’s the cost of the plan?
- What are the available fund and investment options?
Different plan providers have different fees. Usually, the lower the cost, the better. However, just because a plan is cheaper doesn’t mean it has the best investment options. On the other hand, high fees can eat into investment returns and turn a plan with otherwise excellent investment options less valuable.
If you don’t have a company retirement plan and are considering setting one up, consider doing it before the end of the current year. Why? Because if contributions are made before December 31st, they’ll count toward the current tax year (rather than having to wait a full year to receive the tax benefits).
Implementing a retirement plan in your business has many advantages. At TreMonte, we’re here to help determine which type of plan makes the most sense for your business and which can provide the most impactful tax benefits. Reach out to a member of our team to get started!
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