In my last article, I talked about individual retirement accounts. Most investors use their company’s retirement plan to save for retirement. (If you don’t have a plan through your employer, please set up a Roth or individual IRA to make contributions). Saving through your paycheck is easy and many plans now offer auto-enrollment and default investments based on age to make it easier to become a participant. The money comes out of your paycheck before it hits your bank account, which makes it easier not to miss the money each month. What makes an employer plan even better is an employer match, employer non-matching contribution or even profit sharing. If your company offers a match in their employer retirement plan, take advantage of it!! Be sure you are getting the full match from any employer plan, or you are losing out on a tax-free benefit.
In general, many of my clients call their retirement plan a 401(k), but there are many different types of workplace retirement plans. In this article, I will explore the most common plans for small businesses. There are many reasons to set up a plan in your small business. As a business owner you also can take advantage of salary deferrals and any employer contributions. As the job market tightens, offering benefits, including a retirement plan can boost your competitiveness as an employer.
For an individual contractor or small business owner, a SEP IRA can be advantageous. The SEP IRA is funded by the employer only. Basically, it is a way to do profit sharing. You must contribute a uniform percentage of pay for each employee. To add flexibility, a SEP does not have to be funded every year. A SEP has low start-up and operating costs, so it works well for a one-person shop that wants to shield some of its profit each year for retirement.
For a business with fewer than 100 employees, a SIMPLE IRA was created to help small businesses afford a retirement plan with low administrative costs. The employer has two options for contributing to a SIMPLE plan for employees. The employer can choose to do a 3% match, which means the employer must put in, at most, 3% of an employee’s salary if the employee does 3%. The employer only does 2% if the employee does 2% and the employer does 3% if the employee does 4% and so on. The other choice an employer can make is a 2% fixed contribution, which means the employer puts 2% of each eligible employee’s salary in an account with no need for the employee to contribute. The SIMPLE has no top-heavy requirements or need for testing so it is “simple” to administer. However, it still requires upkeep and contributions for employees must be made in a timely manner after they are withheld. For 2023, an employee can contribute $15,500 and an additional $3,500 if the employee is over age 50 (called the “catch-up” contribution).
For employers who want a more robust plan or have more than 100 employees, a 401k is typically the next step. A 401k can provide employee contributions, employer match and profit sharing. It also can have a vesting schedule that allows the employee to keep more of the contributions the longer their employment. The employee contributions for a 401k are attractive with $22,500 being the maximum plus $7,500 if the participant is over age 50. The downside of a 401k can be the costs, most times it requires a third-party Administrator (TPA) to oversee the requirements and testing, which is an added expense.
If you have one, my suggestion is to take the time to review your retirement plan through work. Make sure you are invested in a way that meets your timeframe and risk tolerance (in doubt, check the website for information or use the default, age-based investment) and make sure you are getting the full match. Also, ask yourself if you can save more for retirement? Putting some extra time in to make sure you are getting the most out of this benefit will pay off in retirement.
Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc. in State College.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.
