Retirement Planning – SIMPLE IRA/401(k) & Traditional 401(k)

September 6, 2020

Plan for Retirement

Retirement planning is the process of determining your retirement income goals and the actions and decisions necessary to achieve those goals. Business owners are in a unique situation, not only can they pay themselves a reasonable salary and contribute to a retirement account as an employee, they may also make tax deductible contributions to their retirement account as the employer For example, a Domino’s franchisee may pay themselves a reasonable salary for their work in running their Domino’s store(s) and they may contribute to a retirement plan as an employee of their company and also as the employer. The contributions made by the employer, the Domino’s franchisee’s business entity, are tax deductible (subject to limits). From our experience, when a Client is ready to open a retirement account, we recommend them to connect their accountant, D & S Management Services, to their investment broker as soon as possible and inquire about a SIMPLE IRA/401(k) or a Traditional 401(k) retirement plan.

SIMPLE IRA and SIMPLE 401(k)

The SIMPLE (Savings Incentive Match Plan for Employees) IRA and 401(k) is a convenient retirement plan alternative for small employers (100 or less employees who received at least $5,000 of compensation in the prior year) who do not want the complexities or the costs that come with a qualified plan. The SIMPLE retirement plans do not have additional filing requirements. Plan must be set up any time between January 1 and October 1 of the current calendar year.

Plan Fees

  • Most providers will not charge a setup fee.
  • Annual maintenance fee of $10 to $25 per participating employee.
  • Fee of about $20 per employee when an account is closed or transferred to another provider.

Employee Contributions

  • Each employee can determine the amount they want to contribute as an elective deferral of income. Contributions are deducted from your salary pre-tax. Can change amount on a year-by-year basis. Contributions must be made within 30 days after the end of the month for which they are intended.
  • In 2020, employees can generally contribute $13,500. For participants 50 or older, they may contribute an additional catch-up contribution of up to $3,000. Amount adjusted each year for inflation.

Employer Contributions

Employer contributions are either:

  • Match, dollar-for-dollar contributions up to 3% but not less than 1% of employee compensation, or
  • Provide fixed non-elective contributions equal 2% of compensation for all eligible employees.

Employer contributions must be made by the due date of the employer’s return (including extensions).

Distributions

Distributions are fully taxable.

  • Typically, you must be at least age 59 ½, or meet other specific criteria outline by the IRS to make withdrawals without incurring additional early distribution penalties.

Traditional 401(k)

A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered to eligible employees of a company to help them save and invest for their own retirement on a tax deferred basis. A 401(k) retirement plan is more expensive than a SIMPLE retirement plan and requires an annual tax filing. The plan must be in place by the end of the tax year to qualify.

Plan Fees

  • Most providers will charge a setup fee of $500 - $3,000.
  • Quarterly maintenance fee of $15-$40 per participating employee.
  • Annual administrative fees of $800-$1,000.
  • Additional annual tax preparer fees to file Form 5500 with the IRS.

Employee Contributions

Employee contributions are deducted from their salary pre-tax.

  • In 2020, the basic limits on employee contributions are $19,500 per year for workers under age 50 and $26,000 for those 50 and up (including the $6,500 catch-up contribution). Amounts adjusted each year for inflation.
  • Employee’s may also elect to make additional, non-deductible after-tax contributions to their traditional 401(k) account (if allowed by their plan) subject to limitations described below under employer contributions.
  • All employee contributions must be made by the due date of the employer’s tax return (including extensions).

Employer Contributions

Employer contributions are subject to the following restrictions:

  • In 2020, total employee/employer contribution for workers under 50 is capped at $57,000, or 100% of employee compensation, whichever is lower. For those 50 and over, the limit is $63,500. Amounts are adjusted each year for inflation.
  • For example, if the employee is under 50, they can contribute the max $19,500 and the max an employer can contribute is $37,500.

Employer contribution maximum deduction is equal to 25% of all participants compensation plus the amount of elective deferrals made.

Distributions

Distributions are fully taxable.

  • Typically, you must be at least age 59 ½, or meet other specific criteria outline by the IRS to make withdrawals without incurring additional early distribution penalties.


Summary

Whether you are deciding between opening a SIMPLE IRA/401(k) retirement plan or a Traditional 401(k) retirement plan, we recommend you to reach out to your investment broker and connect them with your accountant, D & S Management Services, as soon as possible. SIMPLE IRA/401(k) and Traditional 401(k) retirement plans defer income and allow employers to make tax deductible contributions. It is never too early to start planning for retirement. You have a lot on your peel, let us at D & S Management Services help you with all your accounting needs.

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