Many small business owners may be using retirement plans like Simple IRAs or SEP plans but they often are not aware they are leaving huge tax savings on the table. There are also quite a few slip-ups that prevent them from taking advantage of the best retirement plans for their company.
First, the most common problem stems from pouring all their available cash flow back into the business and not paying themselves first. They’re going all in on the idea that their business sale will fund their retirement and not diversifying their asset base. Its not how much you make but how much you keep, before and after taxes. We all feel confident of our ability to run our business but do you want to bank it all on the successful transfer of its value for your retirement? More importantly, if your business fails, the corporate veil is very thin and bankruptcy may result. If you’ve built up savings in a qualified retirement plan, its creditor proof and protected.
Secondly, if they are paying themselves, they’re taking relatively small W-2 wage, to minimize FICA and FUTA taxes, and taking a high shareholder distribution, by doing so, running the risk of triggering an IRS audit. Many of the most advantageous retirement plan types base the allowable contributions on a W-2 wage-based formula.
Third, these Simple or SEP plans allowable contributions are very inflexible in the allocation of contributions to owners vs. rank and file employees, thus limiting the amount of contribution for the owner’s and employed family members. For example, in a SEP, since you are the employer, you’re required to contribute the same amount to the plans of all your employees as you do for yourself as the owner. If you save 12 percent for yourself, you have to contribute 12 percent to each employee’s income to their plan. Other more flexible plans like Safe Harbor 401ks and Profit- Sharing Plans allow for significantly relative higher allocations to owners and highly compensated members. All contributions are tax-deductible and any contributions you make on behalf of your employees can be written off as a business expense.
Fourth, many retirement plan providers offer a bundled plan that allows for custody of funds, management and administration. Unfortunately, those are usually boiler plate arrangements with little or no customization to your company’s census data by age, compensation or ownership amount. You’re getting a watered-down version of each of these three components. Hiring a top-notch Third Party Plan Administration (TPA) firm to handle the record keeping and reporting to the IRS will help keep you in line with the regulators, very important.
Fifth, they’re leaving huge tax savings on the table by not employing their spouse or other family members. With allowable deferrals and owner compensation higher contribution limits, adding them can vastly improve your tax savings and put more away for your family, pre-tax.
Sixth, they may not be taking advantage of the mother of all retirement plan tax savings, a Defined Benefit Plan. If you make a lot of money, are in your 50’s or 60’s have at least 3 years to retirement and don’t have many employees, a defined benefit plan allows you to put away substantial amounts for your retirement while making on-going contributions.
You’re basically setting up your own pension plan by figuring out how much you’ll need every month when you retire and then working backward to figure out how to fund it, guaranteeing the income.
Beyond this, there may be opportunities to establish a plan with a customized combination of these plan types.
Finally, not having the right team in place for managing these plans like a knowledgeable CPA, TPA and wealth management firm, can cause things to fall through the cracks. Making sure you have a team that coordinates all these moving parts should minimize any landmines that could disqualify your plan.
The best way to start if have a census analysis performed by a qualified Third Party Plan Administration firm to evaluate your options. Our firm can facilitate this evaluation process and help you establish the best plan for you and your employees. Why not take fully advantage of one of the best tax savings vehicles for you business?
Any opinions are those of Thomas B. Fleishel and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 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. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70.5. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information.
DEFINED BENEFIT PENSION PLAN| Employee withdrawals from a retirement plan made before the age of 59½ may be subject to an IRS penalty for early withdrawal, in addition to being subject to ordinary income tax. For more information about plan distribution issues, please contact your financial advisor. Unlike defined contribution plans, defined benefit plan limits are based on the benefits to be received at retirement, not on the annual contributions. Each year, the plan’s actuary determines the required annual contribution based on factors such as age, salary level and years of service, as well as interest rate assumptions. The maximum annual benefit that a plan may fund is 100% of a participant’s compensation or $230,000 (indexed for 2020), whichever is less. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. and Fleishel Financial Associates, Inc. Fleishel Financial Associates, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services. 812 N. Woodland Blvd DeLand, FL 32720 (386) 738-1800
Secondly, if they are paying themselves, they’re taking relatively small W-2 wage, to minimize FICA and FUTA taxes, and taking a high shareholder distribution, by doing so, running the risk of triggering an IRS audit. Many of the most advantageous retirement plan types base the allowable contributions on a W-2 wage-based formula.
Third, these Simple or SEP plans allowable contributions are very inflexible in the allocation of contributions to owners vs. rank and file employees, thus limiting the amount of contribution for the owner’s and employed family members. For example, in a SEP, since you are the employer, you’re required to contribute the same amount to the plans of all your employees as you do for yourself as the owner. If you save 12 percent for yourself, you have to contribute 12 percent to each employee’s income to their plan. Other more flexible plans like Safe Harbor 401ks and Profit- Sharing Plans allow for significantly relative higher allocations to owners and highly compensated members. All contributions are tax-deductible and any contributions you make on behalf of your employees can be written off as a business expense.
Fourth, many retirement plan providers offer a bundled plan that allows for custody of funds, management and administration. Unfortunately, those are usually boiler plate arrangements with little or no customization to your company’s census data by age, compensation or ownership amount. You’re getting a watered-down version of each of these three components. Hiring a top-notch Third Party Plan Administration (TPA) firm to handle the record keeping and reporting to the IRS will help keep you in line with the regulators, very important.
Fifth, they’re leaving huge tax savings on the table by not employing their spouse or other family members. With allowable deferrals and owner compensation higher contribution limits, adding them can vastly improve your tax savings and put more away for your family, pre-tax.
Sixth, they may not be taking advantage of the mother of all retirement plan tax savings, a Defined Benefit Plan. If you make a lot of money, are in your 50’s or 60’s have at least 3 years to retirement and don’t have many employees, a defined benefit plan allows you to put away substantial amounts for your retirement while making on-going contributions.
You’re basically setting up your own pension plan by figuring out how much you’ll need every month when you retire and then working backward to figure out how to fund it, guaranteeing the income.
Beyond this, there may be opportunities to establish a plan with a customized combination of these plan types.
Finally, not having the right team in place for managing these plans like a knowledgeable CPA, TPA and wealth management firm, can cause things to fall through the cracks. Making sure you have a team that coordinates all these moving parts should minimize any landmines that could disqualify your plan.
The best way to start if have a census analysis performed by a qualified Third Party Plan Administration firm to evaluate your options. Our firm can facilitate this evaluation process and help you establish the best plan for you and your employees. Why not take fully advantage of one of the best tax savings vehicles for you business?
Any opinions are those of Thomas B. Fleishel and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 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. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70.5. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information.
DEFINED BENEFIT PENSION PLAN| Employee withdrawals from a retirement plan made before the age of 59½ may be subject to an IRS penalty for early withdrawal, in addition to being subject to ordinary income tax. For more information about plan distribution issues, please contact your financial advisor. Unlike defined contribution plans, defined benefit plan limits are based on the benefits to be received at retirement, not on the annual contributions. Each year, the plan’s actuary determines the required annual contribution based on factors such as age, salary level and years of service, as well as interest rate assumptions. The maximum annual benefit that a plan may fund is 100% of a participant’s compensation or $230,000 (indexed for 2020), whichever is less. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. and Fleishel Financial Associates, Inc. Fleishel Financial Associates, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services. 812 N. Woodland Blvd DeLand, FL 32720 (386) 738-1800
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