In meeting with clients this summer many of them are having strong years, many have told me “this is my best year yet!” When I hear comments like this my first thought is what can be done with the extra profits to put the company’s money to its best use and what can be done to mitigate high taxes (since as you know that is a by-product of high profits). With this in mind, I wanted to take the opportunity in this installment of Build Your Business to talk about retirement plans and how they can be a win-win-win for companies, employees and owners.
Overview
First, “retirement plan” can mean a variety of different things, for the purpose of this conversation I am referring to tax qualified, employer sponsored retirement plans. Some typical examples of these plans include SIMPLE 401k and 401k plans.
401k plans are defined-contribution plans, which means employees contribute to the plan to fund their own retirement. Further, the employer can also contribute to the plan on behalf of the participants. There are administrative costs to setting up and administering 401k plans, if that cost is a concern then the SIMPLE 401k may be an option worth looking into as it provides employers the opportunity to have a 401k plan that is simplified and typically cost very little if anything to administer.
Benefits
Retirement plans offer many benefits and provide companies options to enhance success, including:
1. Attracting and retaining top talent
Having a retirement plan adds to your company’s suite of benefits, which is important to employees. Further, the employer can contribute to the plan on behalf of the employees, providing another means to incentivize their employees.
2. Providing owners the opportunity to super-charge their personal retirement
If the owner is an employee, they too can participate in the retirement plan. Owners can typically maximize their contributions to the plan; further with the proper planning the retirement plan can be designed to allow larger contributions to go to owners and key personnel.
3. Reducing the effect of income taxes
Tax savings are provided in a few ways, first “employer contributions” (mentioned above) are a tax-deductible company expense. Oftentimes plans can be designed to allow for discretionary contributions, giving companies the option to contribute more when they are more profitable which allow the opportunity to minimize income taxes for the company and its owners. Second, contributions made by participants (employees and employee owners) to a qualified 401k plan are tax deferred and reduce the employee’s taxable compensation.
The benefits are substantial and there are many options, owners can increase the amount that goes to their retirement and reduce their taxes even more by pairing their defined-contribution plan with a defended-benefit plan.
Timing
Often times retirement plans can be set up relatively quickly, however it is best to be proactive and begin the process sooner rather than later. If you would like to begin a retirement plan for your company it would be best to start that in Q3.
In conclusion, a retirement plan can provide a variety of benefits and options to your Company. Keep in mind, the above conversation just begins to scratch the surface as retirement plans come in many shapes and forms and can be designed in a variety of different ways, so it is important to understand the different types of retirement plans and their respective benefits, limitations and costs. If you think your company could benefit from a retirement plan please be sure to talk to us or reach out to me personally at sean@dmsmanagementsolutions.com. We are happy to review your situation, discuss recommended options and help connect you with people we trust to get your retirement set up right.