Want The Best? Design The Best!
Retirement plan design is an area we spend a lot of time on with our clients. In fact, we help many clients set up their very first retirement plan. When a client is thinking about sponsoring a retirement plan, plan design is a natural place to start. After all, until you’re efficiently getting dollars into the plan, making investment decisions, reviewing fees and choosing service providers is always secondary.
At Rea, plan design is ALWAYS part of tax planning. Retirement plans are one of the last best deals out there in terms of the tax deferral opportunity. Salary deferrals are tax-deferred, the earnings on those invested dollars are tax-deferred and company contributions (like match or profit sharing) are also income tax-deferred and completely exempt from payroll taxes.
As a small business owner, you should always be thinking about succession planning and greater diversification of your future retirement assets. Not only does your current income depend on the success of your company, but so does your retirement. It‘s a great idea to systematically pull assets out of your company and set them aside in an account that is safe from potential creditors. As your retirement plan account grows, so do your business succession options.
When your business is just getting started, a SIMPLE IRA plan makes a lot of sense. SIMPLE IRAs are easy to start and inexpensive to administer, but the contribution limits are lower and the opportunity to make large company contributions does not exist. As your company becomes more profitable, transitioning to a safe harbor 401(k) is your best option. This opens up the possibility of higher contribution limits and company profit sharing.
If your business is really successful and you have significant free cash flow on a consistent basis, then a cash balance plan is a great addition to your 401(k) plan. Of course, the cost of the employee retirement benefit is a big consideration, and running illustrations to estimate the employee cost of company contributions is important in the plan design phase. Regardless of your choice of entity (sole proprietorship, LLC or corporation), your business is able to sponsor any of the plan designs mentioned above.
Please be sure to ask us about your retirement plan design the next time we meet to discuss tax planning. It’s a simple process to evaluate your current plan design and illustrate alternatives. This is especially important if you are self-employed and have no employees. You don’t need to have employees to utilize any of these plan designs to save considerable income and payroll tax dollars.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia office)