Small Business Retirement Plans in Tucson, AZ. Starting up a retirement plan for you and your Tucson, AZ employees is a great way to retain talent, incentivize higher performance, and get those much-needed tax reductions. However, for most business owners, it can be difficult to know where to start. What benefits do different kinds of plans provide? What are the different laws that apply to different plans? What happens when I want to change plans, or if I'm closing my business? Correct Capital's team of Tucson, AZ financial planners has over 70 years of combined experience helping business owners and their employees reap the rewards of their retirement plans and understanding the specifics of financial law. Whether you already have a plan and want insight as to how it's performing or need to set up a plan, speak to a financial advisor at 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 Tucson, AZ?
Small business owners and their employees are offered retirement plans through the federal government and various financial custodians to better prepare for retirement. These include:
SEP-IRA
This kind of individual retirement account is available to single-owner 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 modifiable and can vary year-to-year. Additionally, the contributions are deductible from taxes.
Benefits of a SEP-IRA
- High Contribution Limits: Employers can contribute up to 25% of each employee’s compensation, with a maximum of $69,000 for 2024.
- Flexibility: For businesses with changing profits, this plan is ideal as employers are not obligated to contribute every year.
- Simple Administration: Minimal paperwork and no annual filing requirements with the IRS beyond regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: To hold SEP IRA assets, select a company for instance a bank, brokerage firm, or credit union. Alternatively, an online financial institution.
- Execute a Written Agreement: Establish a written agreement and communicate with eligible employees of the SEP IRA plan.
- Make Contributions: To make contributions, calculate an established percentage of each employee’s compensation or contribute based on a variable percentage.
- Maintain Records: Keep detailed records of all contributions made to employee accounts, including dates and figures. Additionally, ensure records are neatly arranged and easily accessible for inspection purposes.
SIMPLE IRA
"SIMPLE" stands for "Savings Investment Match Plan for Employees," and these IRAs are for businesses with up to 100 employees. Employees can make contributions to their own accounts through payroll deductions, and employers can also make contributions. This plan is inexpensive as it's mainly funded by employees, and their contributions can be deductible from taxes.
Benefits of a SIMPLE IRA
- Ease of Setup and Administration: SIMPLE IRAs are easy to establish and maintain, with no annual filing requirements for employers. This makes them ideal for small businesses with constrained 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 promptly 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 banking establishment, mutual fund, or investment brokerage 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 information 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 a yearly cap. While this plan is highly customizable and allows for significant contributions, there may be beginning expenditures and annual fees 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 $two hundred seventy-five thousand dollars annually (in 2024) 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-deferred until distribution.
Setting Up a Personal Defined Benefit Plan
- Consult with a Plan Provider: Work with an investment firm or retirement plan provider that has experience with defined benefit plans to establish the plan.
- Create a Plan Document: Draft a plan document that details the terms of the plan, including contribution requirements and how benefits are calculated.
- Actuarial Calculations: Have a financial analyst calculate the necessary contributions to meet the promised benefits, ensuring compliance with 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: Ensure compliance by filing IRS Form 5500 annually to report on the plan’s status.
- Permanence: A defined benefit plan should be maintained for at least five years. Quickly terminated plans often serve as indicators and may attract regulatory scrutiny.
401(k) Plans
401(k)s are available to businesses 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 before taxes. Alternatively, contributions can be made post-tax (Roth). Investments grow tax-deferred.
- Employer Matching: Many employers offer contribution matching, which can significantly boost an employee's retirement savings.
- Higher Contribution Limits: For 2024, employees can contribute up to $$23k, 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 financial emergencies.
Setting Up a 401(k) Plan
- Choose a Plan Provider: Pick a provider that offers various investment choices, administrative support, and employee education.
- Create a Plan Document: Outline the terms of the plan, including eligibility, contributions, and vesting schedules.
- Set Up a Trust: Ensure plan assets are held in trust to secure them for participants.
- Develop a Recordkeeping System: Keep accurate records of contributions, earnings, and distributions.
- Distribute Plan Information: Employers sponsoring a 401(k) must distribute plan information and updates in a timely manner.
Individual 401(k)
This plan, also known as a Individual 401(k), is designed to provide the same benefits as a company 401(k), but specifically for individuals who are independent contractors, 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 one-fourth 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: Select a financial institution or brokerage that offers Individual 401(k) plans. Search for providers with a range of investment options and reduced fees.
- Create a Plan Document: Draft the terms of your plan, including contribution limits, investment options, and loan provisions.
- Open an Account: Open your Individual 401(k) account with the chosen provider. This typically involves filling out 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 $$250k, you must file IRS Form 5500 annually. Maintain precise records of all contributions and transactions.
Profit Sharing Plans
A Profit Sharing Plan is a type of retirement plan where employers can make optional 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 encourage them to enhance the company’s profitability.
Benefits of a Profit Sharing Plan
- Flexibility in Contributions: Employers can decide each year how much to contribute based on the company's profitability. This makes it an adaptable option for businesses with fluctuating 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 enhance employee morale and loyalty, as employees directly benefit from the company’s success.
- High Contribution Limits: Employers can contribute up to the lesser of a quarter of an employee’s compensation or $66,000 for 2024, making it a beneficial option for employee benefits.
Setting Up a Profit Sharing Plan
- Choose a Plan Provider: Select a investment firm or retirement plan provider to administer the plan.
- Create a Plan Document: Draft a plan document outlining the profit-sharing formula, eligibility requirements, and vesting schedule.
- Communicate with Employees: Advise employees about the plan, how it works, and the benefits they can expect.
- Determine Contributions: Annually decide the amount to contribute based on company profits and the predetermined formula.
- File Necessary Forms: File IRS Form 5500 annually 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 pension scheme that invests mainly in the employer's stock. ESOPs provide employees with an ownership stake in the company, aligning their interests with the business's success, and potentially aiding in establishing the business's future leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs provide employees with an ownership stake in the company, which can increase incentive and loyalty.
- Tax Benefits for the Company: Contributions to the ESOP are deductible from taxes, and the company can also receive tax benefits pertaining to the sale of stock to the ESOP.
- Retirement Savings for Employees: Employees profit from the growth in the value of the company’s stock, providing potentially significant retirement savings.
- Succession Planning: ESOPs can be an effective method for business succession, permitting owners to sell their shares to high-performing employees, who can gradually take the lead as previous owners transition into retirement.
Setting Up an ESOP
- Feasibility Study: Perform a feasibility study to determine if an ESOP is a viable option for your company.
- Hire ESOP Advisors: Consult financial, legal, and ESOP advisors to facilitate the setup process.
- Create a Plan Document: Write a plan document that defines the terms of the ESOP, including how shares will be allocated and vested.
- Establish a Trust: Set up an ESOP trust to hold the company stock on behalf of employees.
- Communicate with Employees: Educate 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 keep your plan compliant.
Multiple Employer Plans (MEPs)
A Multiple Employer Plan (MEP) is a type of retirement plan that allows multiple, unrelated employers to participate in 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 appealing option for small businesses looking to save on expenses.
- Administrative Efficiency: MEPs simplify 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 provide competitive retirement benefits, which can help to attract and retain talented employees and provide a competitive advantage in hiring they otherwise may not have had.
- Fiduciary Relief: The MEP sponsor typically assumes most of the fiduciary responsibilities, diminishing 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 join 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 an investment firm or retirement plan provider to administer the plan.
- Adopt the Plan: Each participating employer must formally adopt the MEP by signing 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 advantages and disadvantages 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 advantages, fees, required minimum distributions, contribution limits, and more. A renowned financial advisor like those at Correct Capital will be able to help you determine which plan works best for you and your team.
Why You Should Set Up a Small Business Retirement Plan in Tucson, AZ
The particular, financial-based advantages to your Tucson, AZ small business retirement plan will largely be based on the specific plan you set up. However, a small business retirement plan, whichever one you choose, has universal benefits. Three out of five employees responded to a survey stating it is a "very important" factor in job satisfaction, while employers also get tax breaks and can better attract and motivate employees. Companies and employees will both enjoy:
Employee Benefits
- More confidence in their retirement planning
- Reduced taxable income
- Contributions can be easily made through salary deferral
- Contributions and investment gains are not taxed until they take them out
- Over the years small savings grow into considerable sums of money
- Ability to perform a 401(k) rollover if it's beneficial down the road
Business Benefits
- Attract, recruit, and retain high performers
- Incentivize based on performance-based employer contributions
- Deduct your taxable income from your taxable income
- Highly customized plans are available
- Tax credits upon initial set-up
Do I Need a Financial Advisor in Tucson, AZ to Assist With My Small Business Retirement Plan?
Creating small business retirement plans is not the same thing as setting up a personal account at your local Tucson, AZ bank. While the federal government does not currently require any business to offer retirement savings options to workers, certain states require employers with a certain number of employees to offer access to a retirement plan. Tucson, AZ retirement consultants that are experienced in helping business owners create retirement plans are usually needed to not only make sure the plan is right for you, but that you follow ever-changing tax and business laws.
As your Tucson, AZ retirement plan consultants for your small business, our financial planners will:
- Help you choose which plan works best for you and your employees, and the right custodian to hold plan assets
- Assist you in setting up your plan, including adopting a written plan, arranging a trust for plan assets, helping employees understand how specific of the plan apply to their retirement, and developing a record keeping system
- Help you operate your plan by adapting as we need to to applicable laws, managing the plan's assets, and distributing benefits
- Help educate your employees on your plan, its benefits, and how they can use it as a part of their ongoing financial health
Correct Capital's Tucson, AZ advisors hold ourselves to the fiduciary standard, meaning we are obligated, by law and by regulatory oversight to only work 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. Request a consultation 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 are reluctant to set up retirement plans due to the assumed high costs.
Solution:
- SIMPLE IRA and SEP IRA: These plans have reduced 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 complexity 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 integration with payroll and fiduciary services.
- Multiple Employer Plans (MEPs): Being part of 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: Using 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 boost participation and savings rates.
- Employee Education: Providing regular education and communication about the benefits of the retirement plan can help increase employee engagement. Offer 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
Handling 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. We 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. Modify the plan as necessary to align with changes in your business environment and workforce demographics.
With the help of dedicated Tucson, 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 Tucson, AZ include:
- 401(k) Audit
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
Small Business Retirement Plans in Tucson, AZ | Correct Capital
Operating a small business comes with a mountain of moving parts and 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 in both small and large companies, and represents over $212 million in total plan assets* throughout the country. To set up a retirement plan for your small business, or learn what we can do for business owners, call Correct Capital today at 314-930-401K or contact us online.
*as of March 2024