Wealth Builders - A StatonWalsh Podcast

What type of Retirement Plan is Best for my Business?

March 06, 2022 StatonWalsh Episode 10
Wealth Builders - A StatonWalsh Podcast
What type of Retirement Plan is Best for my Business?
Show Notes Transcript

The topic of today's episode is corporate retirement plans, more specifically what types of plans exist and what may be best for business owners and their employees. We will break down each type of plan and help you decide on which may be best for your business. As promised, click the link below to download your guide to the different types of plans for your business and click the meet with us button to ask us any questions you may have!

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This podcast is for informational purposes only. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. StatonWalsh and Founder’s Financial Securities do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

Ryan Staton is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.

Devin Walsh  is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.

Check the background of this firm on http://brokercheck.finra.org/



Speaker 1:

Hello everyone. And welcome to today's episode of wealth builders presented by state and Walsh. The topic of today's episode is corporate retirement planning. More specifically, what types of plan exists for business owners and what types of plans may be best for your business? In particular, throughout the course of today's episode, we're gonna break down different types of retirement plans and where they may be a fit. Ultimately there's a plan for businesses of all shapes and sizes. So the goal of today is to decide which type of plan might be a good fit for you. And how do you go about setting up plans like that for your business?

Speaker 2:

This is wealth builders presented by state and Walsh, a show designed to pull back the curtain of the financial industry and bring true transparency to the forefront of conversation. On the show. We cover topics like financial education, current events, and interview business leaders and industry experts with the ultimate goal of helping listeners discover their own path to financial independence.

Speaker 3:

Brian . So today we are talking about corporate retirement plan. I know when you hear about corporate retirement plans, you immediately start thinking about 401ks , but they are multiple options, especially for smaller business, all the way up to larger businesses, and it could be best for them and their employees. So it can really say about today's episode. Um, and so I'll kinda turn it over to you and let's start learning about some of the different options.

Speaker 1:

Sure. So I think at a high level, when we're talking about retirement plans, there are so many different options out there in the , the marketplace. And one of the important things to understand too is in today's environment, we're seeing a lot more employees leave the workplace and transition into entrepreneurial roles where they're starting small businesses, you know, over the past couple of years, more small businesses have been registered and started than ever before. So when you're getting into the world out of being a sole proprietor or an entrepreneur, and you leave your corporate job, one of the things you have to consider is now what happens to my retirement plan for larger businesses? You mentioned 401ks , that's a common one that a lot of them have, but the question is, what do I do if I'm, it's just me or it's my family, or if it's a smaller business, what does retirement planning look like? Or what types of plans are available for me? So I think at a high level where different types of plans come into play has to do with a couple different factors. So one the size of your business, how many employees do you have? Is it just you, are there a bunch of other employees? Is it just you and a spouse? Is it a high handful of family members? All of those factors need to be considered also, who do you want to participate in the plan? How much as an employer do you want the administration of the plan to cost? So that's another factor that plays in. And then also how much do you want to be required to put into the plan on behalf of your employees? So employer contributions like matching or profit sharing, or do you really just want it to be driven by employee contributions and not be required to do that? So there's all those subtle things and subtle features of these different types of plan ends that we talk about . And so picking the right one, it's more of an art than a science, but there's a lot of things that we can talk about. And I think we'll dive in, you know , the individual types just covering them today and then how they differentiate themselves from one another.

Speaker 3:

Let's start talking about maybe solo entrepreneurs, small businesses, maybe just a single owner here . A lot of people here talk about set IRAs or a solo 401k . So what are the rules behind these who can participate in, for example, a set IRA and how is that different than some like a solo 401k , um , really focusing on just those small businesses where one owner, single owner may have a family member work with them . However that may be,

Speaker 1:

Yeah. So where you might commonly see a SEP IRA, for example, is in the world of so proprietors. So someone who is a 10 99 contracted employee, maybe they're doing some kind of commissionable sales work. So you think real estate agents, for example, where they work with a broker brokerage , but they're not technically employees, they're independent contractors. So that's typically where we see a lot of SEP IRAs being started and , and contributed to, but going down the list who can participate in that plan, it's really eligible employees or the employer. They have to be over the age of 21. And there some service requirements and eligibility, as far as like how long you've been with the company, how much you're earning, you have to earn a minimum compensation per year. It's not a participant contribution plan. So it's really driven at the employer level. So that's why we see it a lot more in sole proprietors because they are of the employer slash employee. They're kind of one in the same with a smaller business, say that you had a handful of employees, and it's basically just you as the business owner, putting money into the account on behalf of your employees. So that may or may not be a good fit if you have more employees and just yourself, how that is similar to a oh , 401k , for example. So most people know 401ks, their company may have one, employees are eligible, they can contribute to it. There's all kinds of different provisions, which will break out in when we get to that part. But for a solo 401k , it's really designed for a business or self-employed individual that doesn't have any employees other than maybe a spouse. So if you're someone who you have a consulting business and maybe your spouse works with you in that business, their active participant in the business, really the only two people that can participate in that plan are you and your spouse outside of that. You can't really have any other employees. So it's really designed for that solo business owner, solo self-employed individual relationship. It works much like a 401k where you have those same limitations on contributions. And so more specifically in both with a solo K and a 401k , you have a 20, 22 contribution limit of 20,500 as an employee. And then from an employee perspective. So through matching profit sharing and other types of provisions, you can get up to about $61,000 a year, if you're over age 50 or catch up contributions as well. So the IRS will allow you to put extra away for retirement. The closer you get to that point, but the employer ultimately has full discretion. So in a solo, okay , it's really just you and potentially a spouse. You have sole discretion on whether you want to contribute or not. There's no requirement to contribute and you have a much higher contribution potential where it differs from a set . So in the 401k world, there's predefined limits in the world of a set it's kind of a calculation or 61,000, whichever is less. So the SEP IRA rules say 25% of compensation and their respect special rules around that. If that's a road you want to go down, you definitely want to talk to your accountant about which one or a CPA about which one might be more advantageous from a tax perspective, but for a set 25% or 61,000, whichever is less the last piece to consider. I mentioned administration expenses. So in the world retirement plans, there are certain types of plans that may require different reporting, compliance, testing, some other nuances where , uh , third party administrator might be involved. Typically that's in a 401k safe Harbor, profit sharing plan. Some of the bigger ones with bigger companies that could carry an annual administration fee where you pay a flat fee plus a cost per participant. So those types of plans, Sok , 401k might be a little bit more expensive to administer, but they do have the potential for more contribution than a step . If that 25% ends up being less than the, the $61,000 annual limit for 22 .

Speaker 3:

So you're saying with the , so 401k , there's just a little bit more cost to that compared to a step IRA where you can , you can probably go right onto a fidelity or to whoever may be and just open up a step IRA compared to a little bit more technicality with a solo 401k .

Speaker 1:

Yeah. It definitely carries more administration that doesn't necess necessarily mean it's a bad thing. So this, that goes back to the point of it really boils down to when you're talking about the tax benefits of these different types of accounts, maybe sitting down, if you have a CPA or an accountant bookkeeper, somebody you work with in your business to help you on that side of things, to figure out the cost benefit analysis. So to speak of what's the cost of administering a solo K , and am I going to recoup that cost in potential savings by being allowed to put more money into that versus maybe not being able to fully maximize a set contribution? So it's really just figuring out those numbers and deciding, you know, is it worth the extra work? The so K as well, if you expand your employee, count that structure really kind of goes away to some degree, like you're gonna have to create a new plan, maybe a traditional 401k , for example, that will allow for more part patient from new employees. So there's a lot of different things that you can do with each. It , it really just boils down to one. Do I want something that's straightforward and less complicated or two, do I want to open the door for more potential contribution? You know, if I have a good year in the event that that 401k allows for or contribution than the set might when I get down to my tax calculations every year.

Speaker 3:

Great . And I know one thing that we get asked all the time, we actually covered a little bit about it . Our last episode, we talked about backdoor Roth contributions. And I wanna talk a little bit about Roth 401k contributions, cause I know one of these is eligible for Roth contribu others , not. Can you talk about that a little bit?

Speaker 1:

Sure. So in a SEP IRA contribution, because it's considered all employer contribution, so it's not employee participation, it's employer contribution, anytime your employer, or you as a business owner, make an employer contribution to a plan it's always considered pre-tax money in the retirement planning world. Pre-tax money means no one pays tax on that income tax on that money today, it goes into the account. It can be invested, potentially grows over time. Then when I take it out in retirement, I'm gonna have to pay income tax on all of it, including the investment growth in the world of a 401k, because you can have employee and employer contributions, you can actually select do I want my contributions as an employee to be pre-tax or post-tax? And so the difference there is pre-tax gets into that no tax today, pay tax later. And then in the post-tax you're deciding I'm gonna take that tax bill today, pay it. Then I'm gonna put my net paycheck money into this account by doing that. I now don't have to worry about income taxes later. So that's what really, what a Roth is. 401ks allow for Roth contributions set , IRAs do not

Speaker 3:

Great . So these sounds like two great ways for or small business owners, individual, like you said , realtors separate to utilize these two types of plans. Let's start talking about comment might have a few more employees under a hundred employees. So which one do you think I'm talking about here next?

Speaker 1:

So in under a hundred employee counts . So all of these in theory play in that marketplace, but one in particular, which is referred to as a simple IRA is specifically designed for employers with less than a hundred employees. So you want to have that component where in terms of, if you're a business that's above a hundred employees, a simple IRA is really off the table. The eligibility for the plan also states that employees have to earn at least $5,000 of compensation in a year in order to participate in a plan like this. So they have to either earn or expected to earn, or in that level of income, then we get into contributions and who's eligible how much you can contribute. So participants can make elective deferrals, or basically their own contributions up to $14,000 or a hundred percent of your compensation, whichever is less. So if you make the 10,000 and you wanna put all that into your retirement plan, you could do that. So how that differs from a 401k or even a set IRA is that you can tell it's a much lower limit. So in the world of a 401k for an employee or an owner, participant your employee portion of your contribution is capped to 20,500, or if you're under the age of 50 and a simple it's 14,000. So another thing to take into consideration, like if you're a business and you feel like employees are gonna want more window to put money into their account, they're gonna have to utilize a different structure than a simple. So simple is, is really designed for smaller businesses where maybe employees aren't really reaching that 400 or that 14,000, excuse me, maximum. And then more importantly, at an employer level, you have to make a decision of how you want to contribute. So there is a required employer contribution. And so you have a selection to make. You can just do a percentage of employees contributions, let's say in one instance, 2% of non-elected contributions for, for participants is one option. Or you can do some sort of matching deferral where you can make it up to 3% of their contribution. And so either way, in a simple IRA structure, as an employer, you are gonna have some level of obligation. This is also similar to a set IRA, by the way. So those are a couple plans where discretion doesn't really play a part like you don't have the ability as the business owner to say, I don't wanna put any money in the account on behalf of my employees, I'm gonna open it up to them, but whatever they do, they do, but I don't wanna be on the hook for anything in these types of structures. That's not gonna be the case. There is gonna be some level of required contribution by a business owner .

Speaker 3:

How about for the Roth contributions? Tell me about if that works in simple IRA or if that's not allowed in simple IRA.

Speaker 1:

Yeah. So in simple IRA world, the short answer is no, I , I think to keep it, to keep it simple, no pun intended. I think in that world, it cannot be a Roth IRA. So the reason is to some degree , it's an employer run plan in the sense that there are some employer contributions. It's also really just designed to be pre-tax contributions. Let's just, I think leaving it at that makes it much easier to differentiate. So if , if we're breaking it down again, just talking about pre-tax post-tax or traditional and Roth , if we're gonna use the industry terms, step IRAs and simple IRAs are really only designed for that pre-tax traditional structure. So if we separate those two, if Roth or post-tax is something that you want to, some degree you can eliminate plans like that from your selection.

Speaker 3:

So let's start talking about the four OHK . Now, everybody, when you're planning for job, you're agile almost know , do you have a 401k ? What do you match? That's probably the most recognizable of all the corporate retirement plans. I know that there's structure of a lot of different ways, but let's start talking about who can participate in this plan. I know we've talked about with the other one who's eligible and how much they can contribute. But , um , so what are the limits this year and who can contribute to the basic 401k plan at a company? How is that beneficial to an employer?

Speaker 1:

Yeah. Yeah. So at a high level, really any employer can offer a 401k plan or some variation of a 401k plan. So there's not a limit on, you know, if you're a solo, how many employers you have, those things don't really come into play. It's really any employer, as far as eligibility is concerned, it really boils down to kind of like your basic people with certain service requirements or full-time employees, for example, that work a certain amount of hours every year. There's also things like you have to be over the age of 21 eligible employees. So you can go below that limit just so you know, it's not a hard and fast 21. There are options where you can go below that, but that's determined plan to plan. So there is some flexibility in how the plans are structured, but to keep it simple and kind of 30,000 foot view , any employer can offer it. Employees can most always can be eligible as long as they meet certain provisions like service or age based limits. And then in terms of contributions, most plans you can put in , uh , a hundred percent of your compensation up to the limit. So the 2022 limit is 20,500 for an employee. If you're under the age of 50, if you're over the age of 50, these plans have what are referred to as ketchup contributions, which allow for an additional 6,500. So if you're over age 50, your total limit is about $27,000. If you're under age 50 it's 20,500. And so from there where we get into the different features of a 401k and the , the differences between certain types of plans is how does the employer decide to contribute to the plan? So in a traditional 401k, you could offer it to employees. They could contribute, not necessarily as a business owner required to put money into the plan, but you mentioned one particular way that they do, which is matching. So matching contributions are essentially saying for every dollar you put in, we'll match that up to a certain point. So an example of that, that we see all the time is for every dollar you put in, will match 50 cents on that dollar up to let's say 3%. So a better way of putting that is if I, as an employee put in 6% of my income, then my employer is gonna give me three. So that's just a free match, kind of free money to some degree that an employer is gonna choose to provide matching profit sharing. And some others are considered discretionary benefits, which means that it can change from year to year. Employers could decide to not offer those, but typically we're seeing in a competitive marketplace, more employers are starting to include things like matching profit sharing. There's also something called a safe Harbor plan, which is really just a free and clear. We're just gonna dump a percentage of your income in here every year. And that's gonna allow highly compensated individuals in the company to put more money into the plan. So same rules apply as kind of like a SEP and a solo 401k or two . We talked about there's a $61,000 total limit, and that is your contribution as an employee. So that 20,500 plus matching profit sharing and other money that the employer might put into the plan on your behalf. So a lot of different things to consider inside of these plans. But I think one of the biggest things is figuring out one, the IRS and department of labor say that retirement plans offered by employers, especially in the 401k space, have to be fair to all employees. So they can't be something that's referred to as top heavy , which basically means that certain classes of employees are putting all the money in the plan and everyone else really isn't taking advantage of it. These plans are designed to make sure that all employees are getting some form of benefit out of them, especially for retirement savings.

Speaker 3:

So I know one of the benefits, obviously for employers, the owners , the business, they wanna put these plans in place, obviously to help their employees retain track top talent, but they all wanna be able to put away money for their retirement and for their future. Yeah . So you're saying there are provisions where sometimes if they put in more money than the rest of the company, and they're putting top head because they're contributing too much, it might be something that might happen to them that might have take their money out.

Speaker 1:

Yeah. So there is something referred to as a corrective distribution. So that's where that third party administrator gets in. That's where the additional cost comes into play. When you're deciding on plans, you have to figure out what's fair. It has to be fair under the eyes of the law. So there's legislation, it's an acronym for referred to as a Risa that governs certain retirement, certain types of retirement plans. So 401ks happen to be one of them . And so under that legislation or under those rules, you have to look at a plan annually and figure out am I putting too much as the business owner into the plan and are my employees not really participating? So there's some compliance testing that administrators will do and they calculate, they do all kinds of calculations behind the scenes. And at the end of it, they'll say this class of employees or these highly compensated individuals are putting too much in the plan. And that violates the rules on, you know, I mentioned top heavy plan. So that violates that set of rules. And so therefore you are only allowed, even though the IRS limit says 20,500, you as the owner only allowed to put in X amount of dollars because of low participation. So things that help combat that are matching profit, sharing, safe harbors, those are visions of plans that you can add in to basically avoid ever having an issue with any of that compliance testing. So it gets a little detailed and I guess, in the weeds, so to speak. And that's why when you're administering those type of plans, there's a couple different professionals involved in that process. So for businesses of a particular size that maybe have other people that are employees, maybe non-family members, we're not in that solo entrepreneurial space. Once you start to branch outside of that, you're gonna want to transition into one of these plans for a number of different reasons, one increased responsibility for the plan, but two increased ability to save, you know, one of positive side effects that comes along with growing a business and getting bigger is that there's more money. You know, there's more profit, there's more revenue. And with that, that ultimately can trickle down to ownership and the executive team. And so you want the ability to put more money away if you're earning a good income. So these plans provide that level of flexibility where others may not ,

Speaker 3:

But when we're talking about matching and companies putting in, whether it's a profit sharing , a matching contribution, whatever that is into an employee's plan tell about investing. So if you get a profit share from company for $10,000 and the employees say , great , this looks awesome. I'm gonna leave tomorrow and take my $10,000 . Yeah . Can they do that?

Speaker 1:

So yes and no vesting just for everyone out there, listening is different than investing. So a vesting schedule is essentially a call it a some form of a gotcha, but it's basically the employer is gonna give you this benefit. But in exchange for that, you have to stay with the company for a period of years or the money is not actually yours. So, and this was designed specifically for the reason you just mentioned, oh man, look, I got an extra 5,000 bucks in matching or profit sharing this year. All right , I'm out. I don't have that level of loyalty, take my money and run and go take a new job somewhere else. So for protection for the employer to give this benefit, they bake into a plan, something called a vesting schedule, which can be different periods of time. Take , I think three year , six year , it can be a cliff. It could be equal increments, 25% of it at a time over four years, or it could be very gradual increase. And then a cliff where if you stay with this company for five years, all of a sudden, now we're gonna give you all of the money all at once. So it's one of those things that gives the employer protection and it kind of buys loyalty. If you wanna call it that it keeps you at the company. If you leave prior to being fully vested, 100% and you be partially vested. So let's say you get halfway through that cycle and you leave. And only half of your money is vested. The way that works is half of it. You can move with the rest of your retirement money and the other half stays in the plan. And then that money gets used to offset things like plan expenses, cost fees, stuff like that. Over time, it just kind of goes into , uh , general account of sorts and stays in the plan. So you don't get to take that with you. If you're an employee and as an employer, it can help offset some of the costs of the plan moving forward. So you do get that money back in some way. You don't necessarily just get it back, but you do get it back to use for other purposes, specific to the retirement plan off .

Speaker 3:

There's a great way to , uh , reward employees that are loyal to you. So you're generous enough to reward them the day of, of whether private sharing or a match. And then they're loyal for estates . A five year invest schedule . After five years, they get a hundred percent . They do whatever they want. They stay at the company or leave and they take it right over to IRA.

Speaker 1:

Yeah . And it's important to know too , employee contributions are always a hundred percent yours. So if you're an employee of a company out there and you're wondering, or my contribution's vested, the answer to that question is yes, any of your own money you put in out of your paycheck is always a hundred percent yours. It's really the money that an employer is putting into the plan on behalf of an employee that extra matching profit sharing. That's the money that could be subject to a vesting schedule. So that's the difference. And when we talk about different other types of plans, really in the 401k space, that's where vesting schedules become relevant. And most of the other structures that we talked about, those contributions and employer, employee, all of that is really kind of immediately 100% vested. So it all becomes your money day one. So that's another consideration as an employer. If you want to add not to make it sound uh , bad, but if you wanted to add some strings to those, that sharing of money with employees or offering those benefits, some of these other structures may not be a good fit for your company.

Speaker 3:

So we've talked about a lot today. We've talked about all kinds of core retirement plans from if you're just solo, shop a 10 99 or all the way up, if you have a thousand person company and all the different options. So if you are looking to start a 401k or a step IRA , or have questions about all these different plans or have questions about your current plan, feel free to reach out to us. And once again, we're gonna have this great worksheet available to everybody who listens today and just click below. There's a great resource to have to really show everything that you wanna know about these plans and what could be best for your business. So, Ryan, thank you as always for the insight today. And we look forward to everybody listening to the next episode. Sure

Speaker 1:

Thing . Thank you .