Why Consider Starting A Company Retirement Plan?

Why should you consider a company retirement plan? It can encourage you to save for the future while cutting your taxes right now!

We’ll list reasons for and against offering a retirement plan, suggest two small business plans options, and demonstrate why NOT to use a savings account for your retirement fund.

Top Reasons for Not Offering a Company Retirement Plan

Why do business owners participate and contribute to their retirement at lower rates than the general population?

This Pew Charitable Trusts survey of 1,600 small businesses lists owners’ top reasons for not offering a retirement plan:

1. The expense of setting up a plan
2. The administrative burden of maintaining them.

These reasons are based on false assumptions. In another article, we debunk myths that prevent business owners from saving for retirement.

Retirement Finance Fundamentals:

• Consider starting a company retirement plan to save for retirement AND reduce your current taxes
• Use an investment account to earn what the market earns

Reasons To Start A Company Retirement Plan

• Retirement plans help you and your employees save for retirement

• Employer contributions are tax-deductible. This means that by making contributions to retirement savings, you are also reducing your current tax liability.

• Employers can earn a tax credit for establishing a qualifying retirement plan

• Earnings on the investments in your retirement plan are tax-deferred, so there’s no tax on the growth of your retirement nest egg.

• Retirement plans may help you attract and retain qualified employees (especially in a tight job market)

• Low- and moderate-income participants can earn a tax credit for individuals (including self-employed) who make contributions to retirement plans (Saver’s Credit)

• Distributions may be eligible for tax-favored rollovers or transfers into other retirement programs

Two Company Retirement Plans To Consider

Remember that the top two reasons business owners don’t offer a retirement plan are setup costs and administrative burden. Both of the following plans were created for small businesses and:

• Can be established using a short one or two-page form
• Have low start-up and operating costs
• Do not require annual reporting to the Department of Labor (DOL) or the Internal Revenue Service (IRS)
• Can scale beyond sole proprietorship as your business grows

So, now that you’ve decided to consider a company retirement plan, what are the options for small businesses?

SEP-IRA (Simplified Employee Pension)

The SEP-IRA is NOT a pension plan but a defined contribution plan funded solely through employer contributions. Employers must contribute a uniform percentage of pay for each participant but can change the amount each year and are not obligated to contribute.

SIMPLE-IRA (Savings Incentive Match Plans for Employees)

Similar to 401(k)s, this plan is funded through a combination of elective salary deferrals by employees and required employer contributions each year. Employers must either match employee contributions (up to 3%) or contribute a fixed percentage of each participant’s salary.

The process to establish each of the above plans is quite similar:

1. Choose a financial institution to set up your plan
2. Sign the agreement; set up the IRA(s)
3. Inform your employees about the plan/enroll them
4. Deposit contributions in a timely manner

Use An Investment Account To Earn What The Market Earns

You want your retirement funds working hard every day to grow your nest egg. However, GoBankingRates found 46% of people use a savings account as their primary method to save for retirement.

• The national average interest rates for July 2021:
  • Savings Accounts = 0.06%
  • Money Market Accounts = 0.07%
  • Certificates of Deposit (CDs): 1-Yr = 0.17%; 3-Yr = 0.25%; 5-Yr CD = 0.31%
• Online banks like Ally and Marcus are offering 0.50% rates
• The best (July 2021) rate found on any of the above types of accounts = 0.61%
• The 40-year average S&P 500 Index return = 9.90%

Sally and Sean are both business owners saving for retirement. Sean found a savings account with a fantastic rate of 1%, while Sally established a SEP-IRA.

Which retirement fund would you rather own after 37-years?

In the above example, using a savings account for his retirement fund cost Sean $917,151 compared to what Sally earned.

Notice in the chart above that Sally’s growth rate continues to accelerate. And remember the rule of 72: With an 8% rate of return, even if Sally stopped contributing, her money would double again in 9 years.

Yes, you read that right.

With no further contributions, Sally’s nest egg will grow from $1,215,207 to $2,430,414 in 9 more years!

Be like Sally!

Related Articles

• How to Earn an Additional $1M in Retirement Savings
• Myths That Prevent Business Owners from Starting a Retirement Plan
• What’s So Great About Tax-Deferred Retirement Accounts?
• How to Establish Your Retirement Strategy

Sources

• Personal Finance, E. Thomas Garman, Raymond E. Forgue
• Small Business Views on Retirement Savings Plans | Pew Charitable Trusts
• Choosing A Retirement Solution For Your Small Business (Pub 3998) | IRS
• SEP Retirement Plans For Small Businesses (Pub 4333) | IRS
• SIMPLE IRA Plans For Small Businesses (Pub 4334) | IRS
• How to Make a Qualified Retirement Plan Work for Your Business | the blueprint
• Savings account rates for July 2021 | BankRate
• CD rates for July 2021 | BankRate
• Money market rates for July 2021 | BankRate
• S&P 500 Historical Annual Returns | macrotrends

Whether this is a problem you are currently facing or just something that has been weighing on your mind, feel free to contact me via phone or email so we can discuss your situation, goals, and solutions.

I built my first career in management consulting and have spent the last 20+ years putting my passion and skills to use in community and economic development. For the past seven years, I have provided business advice to hundreds of start-ups and small businesses.