Robert Martin, CCSCS, CIMA, is an Osaic Institutions Investment Executive at Cape Cod Financial Services at The Cooperative Bank of Cape Cod. He can be reached at 508.568.1250 or [email protected].
If you are self-employed or own a small business and you haven’t established a retirement savings plan, what are you waiting for? A retirement plan can help you and your employees save for the future.
Tax advantages
A retirement plan can have significant tax advantages:
- Your contributions are deductible when made.
- Your contributions aren’t taxed to an employee until distributed from the plan.
- Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free).
Types of plans
Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or “qualified” (like 401(k)s, profit-sharing plans, and defined benefit plans).
Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and the Employee Retirement Income Security Act of 1974 requirements in order to qualify for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company.
With IRA-based plans, your employees own (i.e., “vest” in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.
Which plan is right for you?
With a dizzying array of retirement plans to choose from, you’ll need to clearly define your goals before attempting to choose a plan. Ask yourself, do you want:
- To maximize the amount you can save for your own retirement?
- A plan funded by employer contributions? By employee contributions? Both?
- A plan that allows you and your employees to make pre-tax and/or Roth contributions?
- The flexibility to skip employer contributions in some years?
- A plan with lowest costs? Easiest administration?
The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.
What are SEPs?
A SEP allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering you some flexibility when business conditions vary. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $650 or more.
What is a SIMPLE IRA?
The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pre-tax contributions in 2022 of up to $14,000 ($17,000 if age 50 or older; up from $13,500 and $16,500, respectively, in 2021). You must either match your employees’ contributions dollar for dollar — up to 3% of each employee’s compensation — or make a fixed contribution of 2% of compensation for each eligible employee.
What is a 401(k)?
The 401(k) plan is a popular retirement savings vehicle for small businesses. With a 401(k) plan, employees can make pre-tax and/or Roth contributions in 2022 of up to $20,500 of pay ($27,000 if age 50 or older; up from $19,500 and $26,000, respectively, in 2021). These deferrals go into a separate account for each employee and aren’t taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan. You can also make employer contributions to your 401(k) plan — either matching contributions or discretionary profit-sharing contributions.
As an employer, you have an important role to play in helping America’s workers save. Now is the time to talk to your investment advisor about the best retirement plan programs for you and your employees.
Robert Martin, CCSCS, CIMA, is an Osaic Institutions Investment Executive at Cape Cod Financial Services at The Cooperative Bank of Cape Cod. He can be reached at 508.568.1250 or [email protected].
Investment and insurance products and services are offered through Osaic Institutions, Inc. Member FINRA/SIPC. Cape Cod Financial Services is a trade name of the bank. Osaic Institutions and the bank are not affiliated. Products and services made available through Osaic Institutions are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022.