The self-employed need to be mindful about retirement planning. In the past, small and mid-sized business owners could count on selling their business for income, but in today’s economic climate that may not be a viable option for business owners who want to maintain their current lifestyle through retirement. Rising healthcare costs, combined with the increasing costs of living and an uncertain economic outlook highlight the need for a sound investment plan. With all of these factors in play, it is important for small and mid-sized employers to be aware of options they may not have previously considered when it comes to succession and retirement planning.
Defined Benefits Are Not Dead
We’ve seen a major shift from Defined Benefit Plans toward Defined Contribution Plans as employers, particularly large employers, have sought to reduce their pension liabilities. That trend shifts the responsibility of retirement saving from the employer to the employee. While that shift has improved balance sheets, it isn’t necessarily the best solution for a small or mid-sized business owner who must balance their own retirement goals with those of their employees.
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Typically, Defined Benefit retirement plans favor older, more highly compensated individuals. The plans provide an annual retirement benefit based on the percentage of current income that an individual wants to have in retirement. In addition, Defined Benefit Plans come with substantial tax advantages as the contributions to these plans are fully deductible as a regular business expense. Additionally, participants are not taxed on the benefit until they receive payment from the plan.
Utilizing Safe Harbor 401k
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A Safe Harbor 401k is a popular defined contribution choice for small business owners. There are two types of safe harbors to consider: match and non-elective, each of which helps employers get around discrimination testing. A Safe Harbor Match Plan requires the employer to make matching contributions, up to 4% of the employee’s salary. The amount of the contribution depends on how much the employee contributes to the plan and only employees who contribute to the plan will receive a contribution. A Safe Harbor Non-Elective Plan gives the employer and all eligible employees a 3% contribution. With this type of plan design it doesn’t matter if the employee contributes to the plan, they will still receive a contribution as long as they are eligible for plan participation. Once in place, these plans allow employees, including the owner, to contribute the maximum to the plan (For 2013 $17,500 for all employees and an additional $5,500 for employees over 50).
Safe Harbor 401k’s help business owners reduce their personal taxes while allowing them to invest more into their retirement. All things considered, a Safe Harbor 401k could be a good way for the owner and employees to save for retirement while moderating the financial burden on the business.
(AUDIO: Jason Kolinsky explains “The What, Why and How of a 401k)
Profit Sharing Solutions
Profit Sharing Plans can also be a good option for certain business owners. It allows employers to share business profits with their employees; however, they do not have to make contributions out of net profits to have a Profit Sharing Plan. There are a few different profit sharing designs an employer can chose from; among those are new comparability, age weighted, standard formula and integrated formula.
Employers should be aware of these options so they can adequately consider the advantages. Profit Sharing Plans, when appropriate, can provide clear tax advantages and flexibility to help strengthen an employer’s retirement fund.
The Importance Of Hiring A Financial Advisor
Employers need help in choosing the appropriate retirement plan that works for their business as well as their personal retirement goals. No two businesses have the same goals or long-term plans, so it is crucial that they find a trusted advisor to help them navigate their personalized path with confidence. Small and mid-sized business owners face unique retirement challenges, but a financial advisor can turn those challenges into opportunities to both strengthen their business and create a comfortable lifestyle throughout retirement.
About Jason M. Kolinsky, CFP®
Jason Kolinsky is an Investment Advisor Representative with Kolinsky Wealth Management, LLC, an SEC Registered Investment Advisor, and Life and Health Insurance Producer for Kolinsky Financial Group, Inc. He joined the firm in 2007 and is a Registered Representative with American Portfolios Financial Services, Inc. Member FINRA/SIPC. Kolinsky Wealth Management and American Portfolios Financial Services are not affiliated. Jason obtained his Certified Financial Planner certification in 2012.
