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When we think of retirement savings, a consistent theme is the fact that individuals struggle to save enough to comfortably last them through their retirement years. By setting up a retirement plan now, you can help your employees begin saving for their future. Not only is this a nice benefit to offer, it’s pretty much expected these days in order to attract and retain qualified employees.
Establishing a retirement plan provides tax advantages and incentives to both employers and employees, including self-employed individuals. Employer contributions are generally tax-deductible, and employer tax credits may be available to help offset the costs associated with establishing a new plan. Employers deduct their plan contributions, but employees generally aren’t taxed until they receive a distribution from the plan. In the meantime, funds in the plan compound by growing tax-free until distributed, and a saver’s tax credit is available to some employees. Some plans let employees defer a portion of their compensation into the plan.
Various factors come into play in evaluating the retirement savings plans that are available to choose from. Some plans require annual employer contributions, while others allow only employee contributions. Maximum permitted annual contributions can also vary broadly among the options. As an employer, you’ll want to adopt a plan that’s tailored specifically to your business goals. So, choosing the right plan is important.
Deciding on which retirement plan is the best fit can often be confusing because of the choices available and concern about the costs of each of the options. Perhaps you’d like to help your employees (and yourself) save more for retirement, but don’t know where to start. If this describes your situation, we can help. We’ve enclosed a chart from one of our tax services that describes the key characteristics of the most common retirement plan options. It moves from the simplest option on the left side (a payroll deduction IRA, which is really nothing more than a way to assist employees in setting up their own IRAs) to the most complex choice on the right (the traditional defined benefit plan that guarantees employees a certain specified benefit at retirement).
If you’re considering offering a retirement plan for your employees, please take a few minutes to look over the enclosed information. While the table is a greatly simplified version of the complex rules in this area, we thought it might be helpful to you as a broad overview of the options that are available.
IMPORTANT NOTE: A recent change may make the decision a little more difficult. Businesses can now treat all qualified plans adopted after the close of their tax year (and as late as the extended due date for their tax return) as adopted on the last day of that tax year. For plans adopted before 2020, only SEPs enjoyed this benefit. The extended deadline for establishing and funding a plan means that it’s not too late to adopt a plan and make contributions that can be deducted on your 2020 return if your business return is on extension and you act quickly.
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