I have a really cool new client. He is a 74-year-old small business owner with six full-time employees. His 100-year-old, family-owned agricultural business is located in a small Iowa town, population 216. This week he and his employees are signing up for their brand new 401k plan.
Yep, you read that write. This business, owned by someone past “normal” retirement age, is flying in the face of convention because that’s what today’s workers need to secure their retirements — more access to qualified retirement savings vehicles. Let’s break it down!
The world the owner grew up in was filled with jobs that offered a pension if you just stuck around long enough with your employer. Those kinds of opportunities are scarce for today’s employees, who are realizing they need to craft their own plan and save their own dollars for retirement living. Social Security will not provide the income that most retirees will need to maintain their lifestyle when the regular employment paychecks stop. Offering a qualified retirement savings plan is one employee benefit that helps attract and retain high-quality employees.
Employer sponsored retirement plans are a critical piece in the retirement planning toolbox. A recent survey shows that workers who have access to and participate in an employer sponsored plan do more retirement income planning, and those who do more planning have higher levels of wealth upon retirement. Employees are often rewarded with “free” matching contributions from their employer, and both employee and employer contributions can be made pre-tax, reducing everyone’s tax burden today while saving for tomorrow. Many plans allow employees to make after-tax (Roth) contributions, paying their regular income taxes now for the opportunity to make tax-free withdrawals on contributions AND earnings in retirement.
Aside from matching contributions being tax-deductible to the business, extra tax savings incentive comes in the form of credits for employers who establish new plans. For the first three years of a plan’s life, the business can get a 50% tax credit up to $1000 ($500 total credit) for set-up and admin costs associated with offering the plan as well as education for their employees about participating in the plan. The credit applies to employers with at least one but fewer than 100 employees who implement a new SEP IRA, SIMPLE-IRA, or 401(k). Full IRS details can be found here.
In short, access to high-quality, low-cost employer plans has never been better. Employers and employees alike benefit from the offerings in today’s financial services market. If you are a small business owner, please schedule a time to talk over the possibilities. I would also be happy to take a look at your current plan to see where you might reduce costs without sacrificing quality for you or your employees. As a reminder, I do not work on a commission or “sell” anyone’s products, so the advice I give you will be always be in the best interest of you and the employees you value, promoting retirement savings and future financial wellbeing for all.