Small Business Retirement Plans in Gilbert, AZ. Starting up a retirement plan for you and your Gilbert, AZ employees offers a variety of benefits, including tax reductions and a great way to attract and retain your highest-performing workers. However, many business owners understandably have questions about small business retirement plans. What type of plan is best for your business? What are the different laws I'll have to follow? What do I do when a new plan seems like a better option, or if I'm closing my business? Correct Capital's team of Gilbert, AZ financial planners has over 70 years of combined experience helping business owners and their employees reap the benefits of their retirement plans and understanding the ins-and-outs of federal regulations. For anything from initial setup and employee guidance to fine-tuning an existing plan, call Correct Capital today at 314-930-401K or contact us through our website.
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What Types of Retirement Plans Are Available to Small Businesses in Gilbert, AZ?
The federal government and various financial custodians offer a variety of investment options and savings vehicles for small business owners and their employees in preparation for retirement. The most prevalent ones are:
SEP-IRA
This form of individual retirement account is available to sole proprietor businesses, freelancers, and businesses with very few employees. It follows the similar rules as a traditional IRA, where the money put into the account grows without taxes. Employers can deduct contributions they make on behalf of their employees. Only employers make payments, which are adjustable and can vary annually. Additionally, the contributions are deductible from taxes.
Benefits of a SEP-IRA
- High Contribution Limits: Employers have the ability to contribute up to 25% of each employee’s compensation, with the maximum set at $69,000 for 2024.
- Flexibility: For businesses with changing profits, this plan is perfect as employers are not obligated to contribute each year.
- Simple Administration: With this plan, there is minimal paperwork and no requirement for annual filings with the IRS except for regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: To hold SEP IRA assets, select a provider like a bank, brokerage firm, or credit union. Another option is a virtual financial institution.
- Execute a Written Agreement: Inform eligible employees by establishing a plan document for the SEP IRA plan.
- Make Contributions: To make contributions, calculate an established percentage of each employee’s compensation or make payments based on a percentage range.
- Maintain Records: Maintaining records involves keeping thorough records of all contributions made to employee accounts, including time stamps and sums. Additionally, ensure records are well-organized and easily accessible for inspection purposes.
SIMPLE IRA
"SIMPLE" stands for "Savings Investment Match Plan for Employees," and these IRAs are for businesses with a maximum of 100 employees. Employees can make contributions to their own accounts through salary deferrals, and employers can also contribute. This plan is inexpensive as it's mainly funded by employees, and their contributions can be eligible for tax deduction.
Benefits of a SIMPLE IRA
- Ease of Setup and Administration: SIMPLE IRAs are simple to establish and maintain, with no annual filing requirements for employers. This makes them ideal for small businesses with limited administrative resources.
- Employer Contributions: Employers are required to make contributions, either by matching employee contributions up to 3% of their salary or making a non-elective contribution of 2% of each eligible employee’s salary.
- Employee Contributions: Employees can contribute up to $16,000 in 2024, with an additional catch-up contribution of $3,500 for those aged 50 and older.
- Immediate Vesting: All contributions to the SIMPLE IRA are instantly 100% vested, meaning employees have full ownership of all funds in their accounts as soon as contributions are made.
Setting Up a SIMPLE IRA
- Select a Financial Institution: Choose a financial institution, investment fund, or brokerage firm to hold the SIMPLE IRA assets.
- Execute a Written Agreement: Use IRS Form 5304-SIMPLE or 5305-SIMPLE to create a written agreement outlining the terms of the plan.
- Employee Notification: Notify eligible employees about the plan, including details on how to participate and the benefits provided.
- Employee Enrollment: Assist employees in establishing their accounts and making their contributions.
- Employer Contributions: Decide whether to match up employee contributions or make non-elective contributions, and ensure these are made timely.
Personal Defined Benefit Plan
This plan is solely for owner-only businesses, or those with up to 5 employees. With this plan, you target a desired level of retirement income, and contribution limits are adjusted each year based on that, with an annual maximum limit. While this plan is highly customizable and allows for significant contributions, there may be startup costs and recurring costs associated with it.
Benefits of a Personal Defined Benefit Plan
- High Contribution Limits: Allows for significantly higher contributions compared to other retirement plans, potentially reaching $$275k annually (in the current year) depending on age, income, and the desired retirement benefit.
- Predictable Retirement Benefits: The plan promises a specific benefit at retirement, providing more predictability for retirement planning compared to defined contribution plans like 401k plans.
- Tax Advantages: Contributions are tax-deductible, reducing current taxable income. The investments grow tax-free until distribution.
Setting Up a Personal Defined Benefit Plan
- Consult with a Plan Provider: Work with a bank or retirement plan provider that specializes in defined benefit plans to establish the plan.
- Create a Plan Document: Draft a written plan that details the terms of the plan, including contribution requirements and how benefits are calculated.
- Actuarial Calculations: Have an actuary calculate the necessary contributions to meet the promised benefits, per IRS requirements.
- Annual Administration: To manage the plan’s investments, ensure that required contributions are made annually and conduct annual actuarial reviews to adjust for any changes in funding requirements.
- Compliance and Reporting: File IRS Form 5500 annually to report on the plan’s status and compliance.
- Permanence: A defined benefit plan should be maintained for a minimum of five years. Quickly terminated plans often serve as red flags and may attract regulatory scrutiny.
401(k) Plans
401(k)s are available to private companies of any size, and are highly flexible. Employees may defer their salary as contributions, and employers can make contributions every year. Most 401(k) plans come with significant tax planning advantages for both businesses and employees. They can include:
- Traditional 401(k)s
- Safe Harbor 401(k)s
- Automatic enrollment 401(k)s
Benefits of a 401(k) Plan
- Tax Advantages: To reduce the employee’s taxable income, contributions are made tax-free initially. Alternatively, contributions can be made post-tax (Roth). Investments grow tax-free until withdrawn.
- Employer Matching: Many employers offer matching contributions, which can significantly boost an employee's retirement savings.
- Higher Contribution Limits: For 2024, employees can contribute up to $twenty-three thousand dollars, with an additional $7,500 catch-up contribution for those aged 50 and older.
- Loan Options: Participants can often take loans against their 401(k) balance, providing flexibility in case of unexpected expenses.
Setting Up a 401(k) Plan
- Choose a Plan Provider: Pick a provider that offers a range of investment opportunities, administrative services, and employee education.
- Create a Plan Document: Outline the terms of the plan, including eligibility, contributions, and how funds are vested.
- Set Up a Trust: Ensure plan assets are held in trust to protect them for participants.
- Develop a Recordkeeping System: Develop a meticulous record system of contributions, earnings, and distributions.
- Distribute Plan Information: Employers sponsoring a 401(k) must distribute plan information and changes in a timely manner.
Individual 401(k)
This plan, also known as a i401(k), is designed to provide the same benefits as a traditional 401(k), but specifically for individuals who are self-employed, or whose only employee is their spouse. Each year, you can contribute up to the annual 401(k) limit, and the employer may make a non-elective contribution up to 25% of compensation or, if self-employed, an amount considering your earned income and deducting half of self-employment tax paid and contributions made by you during the year. Additionally, you have the option to open a Roth 401(k) account, or roll over pre-tax assets.
Setting Up an Individual 401(k)
- Choose a Plan Provider: Choose a financial institution or brokerage that offers Individual 401(k) plans. Seek out providers with various investment options and minimal fees.
- Create a Plan Document: Create the terms of your plan, including contribution limits, investment options, and loan provisions.
- Open an Account: Set up your Individual 401(k) account with the chosen provider. This typically involves completing an application and providing necessary documentation.
- Make Contributions: Decide on your contribution amounts for the year and make regular contributions. Ensure you stay within the IRS limits for total contributions.
- Compliance and Reporting: If your plan assets exceed $250,000, you must file IRS Form 5500 annually. Develop a meticulous record system of all contributions and transactions.
Profit Sharing Plans
A Profit Sharing Plan is a type of retirement plan where employers can make voluntary contributions to employee retirement accounts, determined by the company's profits. These plans are intended to share the company’s success with its employees and incentivize them to contribute to the company’s profitability.
Benefits of a Profit Sharing Plan
- Flexibility in Contributions: Employers can determine each year how much to contribute based on the company's profitability. This makes it an flexible option for businesses with variable earnings.
- Tax Advantages: Contributions are tax-deductible for the business, reducing taxable income. Additionally, the funds grow tax-free until withdrawal, which can benefit employees' long-term savings.
- Employee Motivation and Retention: Linking contributions to company profits can increase employee morale and loyalty, as employees directly benefit from the company’s success.
- High Contribution Limits: Employers can contribute up to the lesser of 25% of an employee’s compensation or $$66k for the current year, making it a generous option for employee benefits.
Setting Up a Profit Sharing Plan
- Choose a Plan Provider: Pick a bank or retirement plan provider to administer the plan.
- Create a Plan Document: Develop a plan document outlining the profit-sharing formula, eligibility requirements, and vesting schedule.
- Communicate with Employees: Inform employees about the plan, how it works, and the benefits they can expect.
- Determine Contributions: Each year decide the amount to contribute based on company profits and the predetermined formula.
- File Necessary Forms: File IRS Form 5500 each year to report the plan’s status and compliance.
Employee Stock Ownership Plan (ESOPs)
An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees ownership interest in the company, aligning their interests with the business's success, and potentially helping set up the business's next generation of leadership.
An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees ownership interest in the company, aligning their interests with the business's success, and potentially helping set up the business's next generation of leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs grant employees with an ownership stake in the company, which can heighten drive and loyalty.
- Tax Benefits for the Company: Contributions to the ESOP are eligible for tax deduction, and the company can also obtain tax benefits pertaining to the sale of stock to the ESOP.
- Retirement Savings for Employees: Employees benefit from the growth in the value of the company’s stock, offering potentially substantial retirement savings.
- Succession Planning: ESOPs can be an effective strategy for business succession, enabling owners to sell their shares to their best employees, who can slowly take the lead as previous owners move into retirement.
Setting Up an ESOP
- Feasibility Study: Perform a feasibility study to determine if an ESOP is a suitable option for your company.
- Hire ESOP Advisors: Consult financial, legal, and ESOP advisors to guide the setup process.
- Create a Plan Document: Draft a plan document that specifies the terms of the ESOP, including how shares will be distributed and vested.
- Establish a Trust: Establish an ESOP trust to hold the company stock on behalf of employees.
- Communicate with Employees: Update employees about the ESOP, how it works, and the benefits they can expect.
- Compliance and Reporting: File necessary documents with the IRS and the Department of Labor, including Form 5500, to ensure compliance.
Multiple Employer Plans (MEPs)
A Multiple Employer Plan (MEP) is a type of retirement plan that allows multiple, unrelated employers to join a single retirement plan and achieve economies of scale. MEPs are designed to provide small businesses with a economical and administratively efficient way to offer retirement benefits to their employees.
Benefits of an MEP
- Cost Savings: By combining resources with other employers, businesses can reduce administrative costs and fees associated with maintaining a retirement plan. This cost-sharing makes MEPs an advantageous option for small businesses looking to save on expenses.
- Administrative Efficiency: MEPs streamline the management of retirement plans by consolidating administrative tasks. This includes plan setup, compliance, reporting, and participant communication, which are handled by the MEP sponsor or administrator.
- Improved Access to Benefits: Through an MEP, small businesses that might not have the resources to set up a retirement plan on their own can offer competitive retirement benefits, which can help to attract and retain talented employees and offer a competitive advantage in hiring they otherwise may not have had.
- Fiduciary Relief: The MEP sponsor typically assumes most of the fiduciary responsibilities, lessening the liability and administrative burden on individual employers.
Setting Up an MEP
- Join an Existing MEP or Form a New One: Small businesses can either participate in an existing MEP or collaborate with other businesses to form a new one. This step involves selecting a MEP sponsor who will manage the plan.
- Select a Plan Provider: The MEP sponsor will work with a financial institution or retirement plan provider to administer the plan.
- Adopt the Plan: Each participating employer must formally adopt the MEP by executing an adoption agreement and providing necessary employee information.
- Employee Enrollment: Communicate the plan details to employees and facilitate their enrollment in the MEP.
- Ongoing Administration: The MEP sponsor handles the majority of the administrative tasks, including compliance with IRS and Department of Labor requirements, filing necessary forms, and managing plan assets.
There are benefits and drawbacks to each plan, and which may be "best" for you will depend on your business and your and your employees' needs. Different plans and accounts have different tax benefits, fees, required minimum distributions, contribution limits, and more. A respected financial advisor like those at Correct Capital will be able to help you determine which plan works best for you and your team.
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Why You Should Set Up a Small Business Retirement Plan in Gilbert, AZ
The particular, financial-based advantages to your Gilbert, AZ small business retirement plan is dependent upon which plan you set up. That said, a small business retirement plan, whichever one you choose, has universal benefits. Over half of workers say that a retirement plan is a "very important" factor in job satisfaction, while employers reap the benefits both during tax season and in office productivity. Companies and employees will both enjoy:
Employee Benefits
- Better financial security in retirement
- Tax deductions
- Contributions can be easily made through payroll deductions
- Contributions and investment gains are not taxed until they take them out
- Over the years small contributions grow into considerable sums of money
- Ability to conduct a 401(k) rollover if it's beneficial down the road
Business Benefits
- Attract, recruit, and retain your best employees
- Promote great work ethic
- Employer contributions are tax-deductible
- Flexible plan options to fit your plan to your needs
- Tax credits upon initial set-up
Why Should I Consult With a Financial Advisor in Gilbert, AZ to Help With My Small Business Retirement Plan?
Opening small business retirement plans is not the same thing as setting up a personal savings plan at your local Gilbert, AZ bank. While the federal government does not currently require any business to offer retirement savings options to workers, some states require employers of a certain size to offer access to a retirement plan. Gilbert, AZ retirement consultants that have spent years helping business owners set up retirement plans are usually needed to not only make sure you and your employees get the most out of your plan, but that you follow ever-changing tax and business laws.
As your Gilbert, AZ retirement plan consultants for your small business, our financial planners will:
- Help you decide which plan works best for you and your employees, and the right custodian to hold plan assets
- Assist you in establishing your plan, including creating a document that complies with IRS code, establishing a trust for plan assets, helping employees understand how specific of the plan apply to their savings, and creating a record keeping system
- Help you operate your plan by keeping up-to-date with applicable laws, managing the plan's assets, and distributing benefits
- Help educate your employees on your plan, its benefits, and how it can serve as a important aspect of their continued financial journey
Correct Capital's Gilbert, AZ financial planners are fiduciary advisors, meaning we are obligated, by law and by regulatory oversight to only offer advice based on what we believe is in your best interest. As an independent firm, we have the freedom and flexibility to tailor our offerings to best suit the goals of our clients. Schedule a meeting with a member of our advisor team today.
Common Challenges and Solutions in Small Business Retirement Plans
Challenge 1: High Setup and Administrative Costs
Many small businesses hesitate to set up retirement plans due to the assumed high costs.
Solution:
- SIMPLE IRA and SEP IRA: These plans have decreased setup and administrative costs compared to traditional 401(k) plans.
- Tax Credits: The SECURE Act 2.0 offers tax credits for small businesses to offset the costs of setting up retirement plans. Businesses can receive a credit of up to $5,000 annually for three years to cover startup costs, and an additional credit for automatic enrollment plans.
Challenge 2: Administrative Complexity
The challenges of maintaining a retirement plan can be daunting for small business owners.
Solution:
- Outsource Administration: Many plan providers offer administrative services that can handle the majority of the paperwork, compliance, and record-keeping tasks. Providers offer comprehensive administrative support, including payroll integration and fiduciary management.
- Multiple Employer Plans (MEPs): Joining an MEP can significantly reduce the administrative burden as the MEP sponsor handles most of the administrative duties, including compliance and reporting.
Challenge 3: Employee Participation and Engagement
Limited employee involvement can limit the effectiveness of a retirement plan.
Solution:
- Automatic Enrollment: Introducing automatic enrollment can significantly increase participation rates. Employees are automatically enrolled at a default contribution rate but can opt out if they choose. This approach has been shown to raise participation and savings rates.
- Employee Education: Providing regular education and communication about the benefits of the retirement plan can help increase employee engagement. Host workshops, seminars, and one-on-one meetings to ensure employees understand how the plan works and the importance of saving for retirement. Correct Capital offers employee education, including one-on-one meetings and quarterly webinars, if you choose us as your retirement plan advisors.
Issue 4: Regulatory Compliance
Managing the complex regulatory landscape can be challenging, especially for business owners who need to keep their attention on their core business.
Solution:
- Professional Guidance: Hiring a financial advisor or consultant who specializes in retirement plans can help ensure compliance with ERISA, IRS, and Department of Labor regulations. Our team can assist with plan setup, annual filings, and ongoing management.
- Use of Technology: Many retirement plan providers offer online platforms that help manage compliance by automating reporting, tracking contributions, and ensuring that all regulatory requirements are met.
Challenge 5: Flexibility and Adaptability
Business owners need plans that can adjust to changing business conditions.
Solution:
- Flexible Plans: Opt for retirement plans that offer flexibility in contributions. SEP IRAs, for example, allow employers to decide each year how much to contribute based on the company’s profitability, making it a suitable option for businesses with variable income.
- Regular Plan Reviews: Conduct regular reviews of your retirement plan to ensure it continues to meet the needs of your business and employees. Adjust the plan as necessary to align with changes in your business environment and workforce demographics.
With the support of dedicated Gilbert, AZ financial advisors and retirement plan specialists, your business can navigate these challenges to create a small business retirement plan that works for both you and your employees.
Other services we offer in Gilbert, AZ include:
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
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Small Business Retirement Plans in Gilbert, AZ | Correct Capital
Operating a small business comes with a plethora of daily, monthly, and annual tasks to ensure things run smoothly — setting up and maintaining a small business retirement plan shouldn't be one of them. Correct Capital currently manages over 37 plans for a variety of types of businesses, and represents over $212 million in total plan assets* nationwide. To set up a retirement plan for your small business, or learn what other services we offer to business owners, call Correct Capital today at 314-930-401K or contact us through our website.
*as of March 2024