Selecting an IRA to Benefit Your Business
A sponsored IRA might be just the thing to help your staff save for retirement.
If you haven’t yet thought about setting up a retirement plan for your employees, you’re not alone. The task didn’t make the to-do list of nearly a quarter of the 1,600 owners of small and medium-sized businesses recently surveyed by Pew Charitable Trusts. Those surveyed cited expense (71%) and lack of resources to administer a retirement plan (63%) as the top challenges to getting started.
Business owners in the 2017 Pew survey said they would be more likely to offer a plan to workers if it led to greater profitability, and it just might. The main benefits for employers include tax savings (including a possible $500 tax credit for some plans in addition to any deductions for contributions) and the ability to attract and retain top talent. The key is to find the right plan, whether it’s a 401(k), pension or individual retirement account (IRA). Yes, there are employer-sponsored ones available. Here’s a closer look at how IRAs can help you help your employees save for retirement.
Pro: The Simplified Employee Pension plan was created for small businesses and the self-employed, with an easy, no-cost setup and flexibility in how much an employer contributes (employees can’t make contributions). For businesses concerned about cash flow, the ability to increase, decrease or suspend contributions is appealing, and employer contributions are tax deductible. All investment, distribution and rollover rules of traditional IRAs apply here.
Consideration: Because you must contribute the same percentage amount to other employees as you do yourself, you may need to switch to a different plan as the number of workers grows. Also, those who are self-employed may be able to contribute more money to an owners-only 401(k). Talk to your advisor about what makes sense for your own retirement planning as well.
Pro: A popular option for businesses with fewer than 100 employees, this type of IRA has been described as a “starter 401(k)” because it’s designed to be set up quickly at a low cost. Employers must make matching or non-elective contributions and offer all workers a chance to participate. Employer contributions are tax deductible and employee contributions are pretax.
Consideration: These plans are generally less flexible than 401(k) plans, with lower contribution limits.
Pro: MyRA isn’t an employer-sponsored plan. All an employer would do is offer the information and allow workers to set up payroll deductions. It’s a Roth IRA designed by the government for workers who don’t have access to or aren’t eligible for employer-sponsored plans, and allows employees to save in a limited fashion.
Consideration: The only investment option is government bonds, and the maximum an employee can save in the account is $15,000 before it must be transferred to a private-sector Roth IRA. However, if you want a plan with no cost and no administration tasks, this is it. MyRA has other limitations, including the fact that employers can’t make contributions. However, if an employer-sponsored plan isn’t right for your business and you want to offer a way for workers to save, this is one solution. You can always switch to a different savings plan as your organization grows.
With people living longer and retirement stretching to 30 years for some, saving has never been more crucial. However, only a third of Americans are contributing to an employer-sponsored retirement plan, a recent analysis of tax data by Census Bureau researchers shows. By working with your advisor to set up a plan, you can boost your financial well-being and that of your employees.
Withdrawals from retirement accounts may be subject to income taxes, and prior to age 59½ a 10% federal penalty tax may apply. Any SIMPLE IRA distributions made to a participant under age 59½ during the two-year period beginning with the employee’s initial participation date will be subject to a 25% premature penalty. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.