Here Are Some of the Retirement Plan
Options Available to Business Owners
The Simplified Employee Pension (SEP) is an IRA-based plan that is funded solely by the employer. Employees are fully vested in the plan from the time they join. Business owners do, however, have the flexibility to vary contributions to a SEP from year to year or to make none at all. The SEP is often a good choice for sole proprietors or businesses in a less stable financial position. Contributions can be set at a maximum of 25% of the employee’s compensation or up to $53,000 in 2016. The limit for self-employed taxpayers is 20% of compensation.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs, which are restricted to businesses with 100 or fewer employees, are usually funded by both the employer and the employee. The employer must make matching contributions on behalf of eligible participants, generally the lesser of the amount deferred by the employee or 3% of the employee’s compensation. Because employers are required to contribute a set amount each year, this plan is best suited to businesses with consistent earnings. Employees may defer as much as $12,500 in 2016 to a SIMPLE plan, and those who are age 50 or older may contribute an additional $3,000.
Profit-sharing plans are relatively easy to administer and tend to be popular with small businesses. The plans are funded solely by the employer on a pre-tax basis, and contributions are discretionary. Many employers also require workers to remain with the company for a certain number of years before they become fully vested in the plan. With profit-sharing plans, the employer and employees can take out loans against the value of the funds in the account.
The 401(k) is an employer-sponsored plan that allows employees to make salary deferral contributions on a pre-tax basis. Earnings in 401(k) accounts accrue on a tax-deferred basis, but they are subject to income tax upon withdrawal. While employers have the option of matching a percentage of their employees’ contributions to 401(k) accounts, they are not required to do so. The employer can set a vesting schedule for the portion of the funds contributed by the employer. The employee is responsible for managing the investments within the account. Employers may permit 401(k) plan participants to take out loans against their accounts, but this adds to the complexity of a plan. Employee contribution limits for 2016 are $18,000 for most workers or $24,000 for those aged 50 or older (with $6,000 "catch-up" contribution). The employer’s and employee’s combined contribution in 2016 may not exceed $53,000 or 100% of the employee’s pay.
Because the 401(k) plan has many reporting requirements and is costly to administer, it is generally best suited to companies with at least 25 employees. Businesses with large disparities of pay between employees may also encounter problems with the 401(k) nondiscrimination tests, which can limit the contributions of highly compensated employees if the company’s lower paid workers do not contribute comparable percentages of their incomes.
Safe Harbor 401(k)
The Safe Harbor 401(k) offers the same benefits as the traditional 401(k), but it may allow employers to maximize contributions and still satisfy nondiscrimination rules. With a Safe Harbor 401(k), employers must make matching contributions for employees, but they have two options: Companies can make contributions for each eligible employee (even if the employee does not contribute) of 3% of annual compensation, or the company can match 100% of the first 3% of employees’ deferred contributions, plus 50% of the next 2% of employees’ contributions. While the mandatory employee match is larger with a Safe Harbor 401(k) than with most other plan types, the Safe Harbor may permit employers to make more pre-tax contributions on their own behalf.
Defined Benefit Plans
With the rise in popularity of 401(k) plans, defined benefit plans have faded from the spotlight. However, they can still be an attractive option, particularly for business owners with few employees who are looking to accelerate their personal savings. Using a defined benefit plan, business owners may be able to set aside significantly more than they could with a defined contribution plan. In 2017, the maximum annual benefit and accrual limit is $215,000. On the other hand, defined benefit plans can be more complex and costly to administer than other options, and they are usually more expensive to fund than defined contribution plans.
Deferred Compensation Plans
A deferred compensation plan is often established by companies that already have a qualified plan, such as the 401(k), to provide additional retirement benefits to key executives or employees. This type of plan represents an agreement whereby one person (or legal entity) promises to compensate another for services to be rendered currently, with actual payment for those services delayed until sometime in the future. Using a deferred compensation plan, an employer can offer an employee extra income that will not be taxed until some future date, usually upon retirement, death, disability, or termination of employment. Because these plans are not governed by Federal pension laws, making them “nonqualified,” they can be extremely flexible. Their very flexibility—and the associated risks—means that business owners should seek out professional guidance from tax, legal, and financial professionals before setting up these plans.
Defined Benefit Plans (DB)
Defined Benefit Plans (DB) is for more established companies and professionals who are earning a significant income. Given the right demographics, a defined benefit plan can provide both tax savings and financial security that effectively reward the hardworking, well-compensated business owner, as well as long-term employees.
Many mature companies have experienced owners who are in the 35% federal income tax bracket. This favorable type of plan may allow the owners to make TAX DEDUCTIBLE contributions that may be in excess of $100,000 depending on age and income. A plan implemented now will impact the current year federal income taxes.
Defined Benefit Plans base the annual contribution on the amount needed to fund the future benefit of each participant. Actuarial tables are used to determine the future accumulated benefits each participant will be entitled to receive. These DB Plans allow the highest paid and the oldest employees (often the owners) to make larger annual contributions than would be allowed under defined contribution plans. For example, the tax code allows a participant of a DB Plan with an annual income of $240,000 per year to accumulate approximately $2 million dollars¹ of retirement dollars in the future. As owners generally are the highest paid employees, the typical DB Plan will greatly benefit the owner(s).²
Protect Your Business
As a business owner, you know being prepared for anything is part of who you are. If one thing is certain today, it's that you can't be certain about what will happen tomorrow. You can, however, be certain that you've taken action to help protect yourself and your business from the unexpected.
Think about what would happen to your business if you, your business partner, or a key employee were to unexpectedly die or become too sick or injured to work. There's no doubt that this would have a tremendous impact on your business and its continued success. But there's good news: this is something you can plan for.
Having the foresight to protect your business against the loss of an owner or an essential employee — perhaps the company's most valuable asset — can mean the difference between business as usual or closing up shop. Just as you would insure your business property, you should also consider insuring the people who have the biggest impact on your company's success. We can help with business planning strategies that are designed to protect your business from the unexpected and help ensure the business you've worked so hard to build withstands the test of time.
Consider a few of the following options
to help protect your business:
Disability Income Insurance
Most likely, your company has already taken the appropriate steps to protect the business in the event of the death of an owner or partner. But have you protected the business in the event of a more common scenario - an owner's or partner's long-term disability?
Learn how life insurance can help you protect your business from the unexpected death of a key employee.
Long Term Care Insurance
Having long term care insurance is part of smart business planning and can help protect your business and family if a long term care need should arise.
For over 40 years working with our clients, these are the 5 major risks we help them avoid when planning for Retirement.
Longevity risk refers to the possibility that you’ll outlive your savings. With retirement lasting anywhere from 10-40 years (perhaps longer depending on how early you retire) this is a very real issue for many retirees, especially now that most people are relying on their 401(k) and IRA funds instead of a monthly pension check.
Inflation isn’t so much a risk as inevitability. When you’re working, your income typically increases to keep pace with inflation. But after retirement, many individuals are living on a more or less fixed income, and inflation becomes a major factor. Consider this… Over a 25 year span, 4% annual inflation will devalue a $1,000 monthly pension to the equivalent of just $375.
Rising Healthcare Costs
One other lurking risk factor during retirement is the rising cost of healthcare. This can become even more of a problem if you are no longer covered under the benefits of the company that you were working for. Although Medicare offers some coverage, most retirees with health issues will have to pay a significant sum for their total healthcare bills out of their retirement fund.
Death of a Spouse
Even if two people really can live as cheaply as one (doubtful), one person can't pay all the household bills if her spouse dies and thereby causes Social Security and pension income to drop sharply.
When you’re working, down markets can be overcome. You’re still in the middle of the accumulation phase and, as long as you buy and hold, you have plenty of time to recover. That being said, a down market can wreak havoc if it occurs early in your retirement. The reason for this is that in retirement, you’ll likely start selling assets to generate cash. When you pull money out during a down market, you effectively lock in that loss making it hard to recover.
If you want a higher rate of return, do you have to have some risk?
The question is; does risk increase the rate of return or does risk increase the probability of losses?
Where can you put your Retirement Savings?
Fixed Indexed Annuity
Fixed Indexed Annuity
Fixed Indexed Annuity with guaranteed lifetime income rider
Fixed Indexed Annuity with guaranteed lifetime income rider.
You know what it takes to build a successful business. It takes vision, preparedness, skills and desire — not to mention a focused dedication to achieving your goals. If you are like most business owners, you’ve worked hard and made many sacrifices to grow your business. That’s why you should put just as much energy into protecting it as you did building it.
Ask yourself these important questions:
- Do I have a plan for my business when I retire?
- Is my business capable of continuing its success in the event of my or my partner’s untimely death or disability?
- Is my family adequately protected if something were to happen to me?
- Have I done everything I can to attract, retain and reward the key employees that are critical to my business?
If you answered "no" to any of these questions, you may want to consider implementing a formal business planning strategy. Proper planning can help you protect your business, attract and retain key employees, and help ensure that your business transfers in the manner in which you choose.
No business plan is complete without a financial strategy for the unexpected. Start by exploring all your protection options.
Most business owners spend the majority of their time working in their business instead of on their business. We can help ensure that the business protection needs that are critical to the long-term success of your business are taken care of.
Financial management is as much about managing operational risks as it is about managing business objectives. Whether you're a fresh start-up or well-established enterprise, continued operational foresight can help ensure your success and your roadmap for the future. Thankfully, an array of insurance products exist to help meet your needs.
The death or disability of an owner is one of the greatest threats to a business. Not only can it severely impact the day-to-day operation of the business, but it can raise all sorts of business succession and estate tax problems — proper succession planning can help.
Succession planning affects everyone who has an interest in the business — business partners, family members, and key employees. It is critical that you have meaningful discussions about often overlooked issues, such as who the ideal successor should be, what is the value of the business, and what is the timetable for transition. No matter what event occurs, either expected or unexpected, we can help you develop a succession plan that can help ensure a smooth transition according to your vision for the business' future.
Our firm is not permitted to offer, and no statement contained herein shall constitute, tax or legal advice.
You should consult a legal or tax professional on any such matters.