If you want to be able to attract talented employees to your company, you need a comprehensive benefits package. As such, it is essential that you pick out a great employee retirement plan. With all the types of plans out there, it is easy to get confused by things like “what is a 401k?” or “what’s the difference between a 401k vs SEP IRA?” This guide will give you a basic overview of common retirement plan types, so you can figure out which ones are best for your employees and your business.
The 401(k) is one of the most common types of retirement plans in the nation. It is an employer-sponsored retirement account, where you deduct a set amount from your employee’s pre-tax salary to invest it in something. Employees are only taxed on the income when they withdraw it. You can choose to “match” your employee’s contributions, adding extra funds to their retirement account. This can then be deducted from your pre-tax income, potentially saving you money on your taxes too.
The big benefit of 401(k) retirement planning is its flexibility and high level of salary deferrals. Any business with more than one employee can use it, and employees can choose how much they want to add to their account. Due to its popularity, you can easily find retirement plan consulting services that will help you set up 401(k) plans.
From the employer’s perspective, the only potential downside is that you have to run it, so you might need to pay some fees to a financial advisor. The main downside for employees is that they can only contribute money through you, and they get financial penalties for withdrawing early. With that in mind, a 401(k) might not be desirable in an industry with a lot of turnover and younger employees.
Another option to consider when learning how to pick a retirement plan is the 403(b) plan. The 403(b) retirement plan is very similar to a 401(k) plan. The main difference is that it is only offered to certain types of businesses. To be eligible for this plan, companies need to be part of the public sector or other tax-exempt organizations. Just like a 401(k), the pre-tax salary can be placed in an employer-run investment account, and then funds are only taxed when they are withdrawn.
The 403(b) does have some perks compared to the 401(k). Due to the difference in regulations, there are often fewer administrative fees associated with 403(b) plans. Funds are vested faster, which allows employees to use their retirement even if they leave the company earlier. Employees who are older may prefer a 403(b) plan because it lets employees with 15 years or more of service make additional catch-up contributions.
In addition to narrow eligibility restrictions, 403(b) plans also have fewer choices of investments. The lack of investment range can potentially result in less growth. Business owners should also be aware that if a 403(b) does not have ERISA protection, creditors can potentially take hold of the accounts later on.
Next to a 401(k), the IRA is the other most well-known retirement plan. The IRA, or individual retirement account, also lets employees put either pre-tax or post-tax funds into an investment account. Then the account’s earnings are not taxed until they are withdrawn. Employees can do an IRA by themselves, but employers have the option of getting involved through a SIMPLE IRA. This stands for Savings Incentive Match Plan for Employees, and it is essentially an IRA that allows employers to contribute extra funds.
SIMPLE IRAs can be good for an employer because they do not require the employer to handle the actual investment. All you have to do is fill out a few forms to set up the program. Then you get to enjoy all the tax benefits of providing contributions to your employee’s retirement. From an employee’s perspective, the SIMPLE IRA Is very desirable because it allows them to save more with retirement.
Keep in mind that there are limits to SIMPLE IRAs. You can only do it if your company has 100 or fewer employees, so it might not be the best retirement plan for a company with plans to expand. Also, you are required to make contributions once you join the plan, so in a bad year, your tax savings might not cover the cost of contributions. Something else to consider is that the contribution limits are lower than a 401(k), making it slightly less appealing to employees.
A SEP IRA is short for Simplified Employee Pension because it is essentially a form of pension. Employees themselves do not contribute to the plan. Instead, the employer is the only one contributing to the plan. All employer contributions up to the maximum annual amount are tax-deductible, and employees are only taxed when they withdraw the funds.
SEP IRAs are useful for small businesses because they do not have a lot of start-up and operating costs. Furthermore, you can skip contributions in tough years, which ensures your business does not lose money due to the account. From the employee’s perspective, SEP IRAs can be good because contributions are immediately vested. This provides protection for employees because they own all the funds no matter when they leave your business.
While SEP IRAs are easy and flexible, they do have some potentially inconvenient requirements. If an employer offers it to one employee, they must offer it to all who meet some very basic requirements like working for the company for three years. Employees generally like that they get a retirement fund without having to contribute, but some may want the opportunity of contributing to the plan themselves.
TrinityPoint Wealth is Here to Point You in the Right Direction
Still not sure what the best option is for you and your company? It might be a good idea to speak to the experts. At TrinityPoint Wealth, we provide retirement plan consulting services. Our team can analyze your business, discuss your financial goals, and assist you with finding your ideal solution. Contact us now to schedule a consultation.
This material prepared by TrinityPoint Wealth is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by TrinityPoint Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. TrinityPoint Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information may have been condensed or summarized from its original source. Materials herein were prepared by AGI Marketing. TrinityPoint Wealth and AGI Marketing are not affiliated.
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