Robert J. Waite and John Cusimano
Whether you’re just starting out or firmly ingrained in your practice, retirement will be here sooner than you think. Are you doing enough to prepare? A tax deferred retirement plan may be the roadmap to a successful career and an even more joyous retirement. There are a variety of plans at your disposal – SIMPLE Plan IRAs, SEP IRAs and 401Ks to name a few. We’ve heard it all before, but are you truly implementing what we all know we should be doing? Perhaps not. Almost 72 percent of workers in small companies have no retirement plan available through the company; an additional 9 percent have a companysponsored plan available but do not participate. Only 19.5 percent of workers in small private-sector com¬panies report participating in a retirement plan.
Ultimately, the primary reason many small business owners have not established a retirement savings plan is that they are simply too busy running their business. They are busy driving revenue growth, dealing with employees and prospecting for new clients. Many business owners make the assumption that the business itself will be their retirement fund. Unfortunately, in many businesses, it can be a difficult transition to sell or to pull the liquidity out of their entity. They may also have outstanding debts and student loans. While it is extremely important to stabilize your personal finances by paying down your student loans and building your personal savings, offering a retirement plan is extremely important in growing and stabilizing your business. The benefits of a retirement plan go beyond simply preparing for your future. For one, offering a plan gives your dental practice a competitive edge when it comes to attracting top talent and similarly, reducing employee turnover. It goes without saying that if an employee has the choice between two equally appealing job offers and one company offers a retirement savings plan while the other one does not, most astute employees will opt for the position that offers a more attractive total benefit package. In fact, nearly 40 percent of small business employees say they would leave their current job for one that provides some type of retirement plan. Establishing and maintaining a retirement plan not only shows that you value your employees, but also by retaining employees, you will reduce your costs on recruiting and training new ones.
Secondly, there are potential tax benefits to offering a retirement plan. For one, your business may be eligible for a special $500 tax credit for the first three years of a new 401K plan. This $1500 in savings will drastically reduce any start-up costs associated with the creation of the plan.
Additionally, if you match a portion of an employee’s contribution to their retirement plans, you get to deduct those matching contributions at tax time and further help your employees grow their savings. As a further benefit, the business owner will also save on their own personal taxes by investing in the company retirement plan.
It is a common misconception that employer sponsored retirement plans are difficult to set up and maintain. This could not be further from the truth! Today’s plans are designed to be easy for the small business owner to set up, administer and maintain. With online setup and management, plan administration requires very minimal paperwork and very little time commitment. Employees have 24/7 access to their accounts online and a retirement specialist or advisor is just a phone call away. This is especially valuable for many small business owners who do not have a dedicated Human Resources department or contact. These are some of the most common small business retirement plans: Safe Harbor 401(K) – this plan is for an employer who wants a plan that allows employees to contribute to their own plans. In this plan, the maximum annual contribution limit is $18,000 ($24,000 if you are over 50 years old) and all employees over the age of 21 with one year of service must be eligible to make salary deferral contributions. The Safe Harbor 401(K) requires employers to contribute either 3 percent to all eligible employees or match employee contributions up to 4 percent. All matching contributions are automatically vested for employees. The Safe Harbor 401(K) also allows owners and employees with higher wages to contribute up to their maximum contribution limit. 401(K) – The standard or traditional 401(K) is similar to the Safe Harbor 401(K) but allows owners to add a vesting period. Employees may have to work one, two or three years before matching contributions are fully vested. Unlike the Safe Harbor 401(K), owners and higher wage income employees are limited on the amount they are allowed to contribute.
Profit Sharing – This plan is considered a defined contribution plan. The employer is responsible for determining when and how much the company contributes to the plan. The amount allocated to employees is typically based on the employee’s salary or level within the organization. Unlike other plans, a profit sharing plan does not allow employees to make contributions. Employer’s contributions are discretionary; there is no set amount. Factors such as a company’s financial performance may inﬂuence the employer’s decision to make a contribution one year but not the next. This is why it’s called a “Profit Sharing” plan. Simplified Employee Pension (SEP) – This plan acts like a pension and all contributions are made by the employer. The maximum contribution is 25 percent of an employee’s income or $54,000 in 2017, whichever is lower. All SEP IRA contributions are deductible as a business expense and employers are not required to make contributions every year. Simple IRA – Savings Incentive Match Plan for Employees of Small Employers, better known as the SIMPLE IRA plan. This plan lets your employees defer up to $12,500 in 2017 ($15,500 if age 50 or older). The business owner must promise to match employee contributions dollar for dollar up to 3 percent of pay, or to make a “non-elective” contribution for all eligible employees, whether or not the employee contributes, equal to 2 percent of pay. (The 3 percent of pay match may be reduced to as little as 1 percent in any two of five years.) These retirement plans are typically tax deferred, meaning that the contributions are made with pre-tax dollars and the assets grow tax free until ultimately withdrawn. Ordinary income taxes are only paid when an employee withdraws money from the account, ideally upon retirement. It should be noted that the 401(K) and Safe Harbor 401(K) plans also allow for after-tax Roth contributions. In this instance, the contributions are made with after tax dollars while the earnings continue to grow tax-deferred. The biggest difference is that here, all withdrawals are tax free as long as the assets have been maintained within the account for at least five years and the account owner is over the age of 59.5 years old. Please note that after-tax Roth contributions are eligible to be withdrawn with no tax implication, at any time.
With so many different options, the decision can certainly be daunting. There is no disputing that choosing the right plan takes careful consideration. Each plan type has its own separate and distinct eligibility rules and overall benefits and considerations.
Together, John and R.J. have over 27 years of experience. They work with a vast network of retirement plan administrators. For more information please call toll free 1-800-531-3660 to speak with either R.J. Waite or John Cusimano at Raymond James Financial or visit www.raymondjames.com/rjwaite.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.