We understand that beginning retirement planning can be overwhelming. However, at Legacy Wealth Management we are here to remove the overwhelm with knowledge and tangible steps towards success. At Legacy Wealth Management, we are committed to being a team that supports your financial goals and retirement planning. We want to assist you in getting started and staying the course to your financial destination. True success comes when people simply begin and continue taking small steps towards formalizing and achieving their financial goals. Please refer to this list to learn more about several retirement options available to small businesses and business owners.

401K

A 401K is a company-sponsored retirement account that employees can contribute to (401K refers to the IRS tax code outlining the tax benefits associated with this savings method). Employers have the option to make matching contributions into an employee’s 401K. These are traditionally used for larger businesses to help their employees prepare for retirement.

Simple IRA

A Savings Incentive Match Plan for Employees IRA (Simple IRA) allows employees and employers to contribute to traditional IRA set up for employees. Simple IRA’s can be an ideal plan for beginning retirement savings for small employers not currently sponsoring a retirement plan. These are straightforward

and inexpensive to establish and operate. Simple IRA’s give employees a shared responsibility for their retirement. This plan does have lower contribution limits than some other retirement options.

Roth and Traditional IRA’s

You have heard that IRAs are a great way to save for retirement, but what are the primary differences between Roth and Traditional IRAs, and how do you know what will be best for you in the long run?

The main difference between Roth and traditional IRA’s comes in when you will receive a tax break. Contributions to a Roth IRA are not tax-deductible, but when qualified withdrawals are made in retirement, the money is tax-free. Contributions to a traditional IRA are tax-deductible but will be taxed when you withdraw during retirement. Therefore, when choosing between IRA’s, it is wise to determine if you think your tax rate will be higher or lower in the future.

For most retirement planners, preference usually goes Roth IRA’s because of several built-in benefits. First, even though discouraged, early withdrawals are much more flexible with a Roth IRA. Next, Roth IRA’s have fewer restrictions for retirees regarding withdrawals (for a traditional IRA, people must take required minimum distributions beginning at 72). Using a Roth IRA in conjunction with most employer’s 401K plans provides tax diversification. You will be able to use the flexibility in Roth IRA monies to manage your tax burden during retirement. For both Roth and traditional IRA’s, 2020–2021 contribution per year per individual is $6000 and if you are above 50 you may contribute $7000 each year.

Safe Harbor 401K

A Safe Harbor 401K plan is a type of 401K that avoids most yearly compliance tests. Suppose a 401K includes a Safe Harbor provision, the employer can make annual contributions on behalf of employees which are then vested immediately (Vesting deals with the ownership of funds within a retirement plan. An employee’s contribution will always be their own, but the employer’s contribution can be dependent on the length of employment). A Safe Harbor 401K plan works best for many small business owners with full-time employees.

Solo (Individual) 401K

A Solo, or Individual, 401K is a retirement account for self-employed or business owners with no full-time employees. This plan offers several of the same advantages as a traditional IRA with a few differences. A traditional IRA is usually provided by a business that allows employees to contribute. With a Solo 401K, an employer may contribute as both an employee and employer (maximizing their retirement amounts and business deductions). There are also several options for spouses that receive income from a business as well. For example, suppose the business owner’s (or employer’s) spouse contributes to the Solo 401K; the non-owner spouse could also get a contribution from the business at the same percentage. A Solo 401K can also work for small businesses with multiple owners if one plan is established, with all owners acting as participants and following the same set of rules. For many self-employed individuals with no employees, a Solo or SEP IRA become the best retirement option.

SEP IRA

A Simplified Employee Pension (SEP) allows employers to contribute to a traditional IRA (SEP-IRA) set up for their employees. Businesses of any size (and even self-employed) can establish SEP-IRA’s. SEP’s are easy to establish and operate with low administrative costs and the ability to make flexible contributions. Employers are the only one that can contribute to these plans and they must contribute equally for all eligible employees, up to 25% of the employee’s compensation. For many who are self-employed with no employees, a Solo or SEP IRA become the best retirement option.

Pension Plans

A Pension Plan is another option for employers to contribute to an employee’s retirement. The most significant difference between this plan and a 401K option is the result being a defined-benefit for the employee instead of defined-contribution plan. A defined-benefit plan will have an ending payout depending on the investment’s performance and employee/employer contributions. Pension Plans are usually more costly to employers, however there are alternatives that are very similar to defined-contribution 401K plans.

Cash Balance Plans

A cash balance plan is comparable to a defined-benefit pension plan. The slight difference between these two plans is in the creation of an individual account for each covered employee, which will give an individual specific lump sum retirement sum.

This document is provided for educational purposes only. All investment strategies have the potential for profit or loss. No investment strategy can guarantee positive returns. The information contained in this document should neither be construed as a provision of personalized investment advice nor as a guarantee that a certain level of results will be achieved. Under no circumstances should this information be construed as an offer to sell or a solicitation of an offer to buy any particular service or product.

Choosing a retirement approach can feel daunting, but as you review the above information, please remember we are happy to discuss what option best fits your business and family goals. Let’s get started today to make sure that you are moving towards the right retirement option for your financial future.

This document is provided for educational purposes only. All investment strategies have the potential for profit or loss. No investment strategy can guarantee positive returns. The information contained in this document should neither be construed as a provision of personalized investment advice nor as a guarantee that a certain level of results will be achieved. Under no circumstances should this information be construed as an offer to sell or a solicitation of an offer to buy any particular service or product.

Source: Justin Martin