Background: Sometimes people want to have the ability to save more for retirement than they are; however, they are limited by various Retirement Plan rules. Depending on the type of plan a client is utilizing, they may have a very small limit such as $5,500, or a very large limit of well over $100,000.
Our Case: We began working with a small business that had been utilizing a Simplified Employee Pension (SEP) IRA. This type of Retirement Plan only allows Employer contributions; employees are not allowed to save their own money into the Plan. The owners of this company, Deb and Sue, were providing a generous contribution, in fact, the highest allowed in a SEP, 25% of compensation. We spent time working with Deb and Sue to prioritize their goals. They wanted to encourage their employees to save for retirement, they wanted some flexibility in contribution levels and they wanted the ability to set more of their funds aside for retirement.
Deb and Sue have moderate salaries in the $60,000 range, which means they are only eligible for a SEP IRA contribution of $15,000 each. They have additional business income, creating additional cash flow for potential savings. SEP IRA contributions can only be made to a Traditional-style (pre-tax) account as well, as they are employer contributions. Lastly, since SEP IRAs are treated as individual accounts, they do not provide the ability to aggregate all assets for lower overall fees on these accounts.
The Results: First and foremost, they wanted the ability to continue to provide their employees with a generous retirement contribution. They were excited to hear they could have a portion of this require a matching contribution. By creating a Safe Harbor 401(k), we established a Plan that now provides a 5% matching contribution. We also added Profit Sharing to this Plan. Now Deb and Sue can determine each year how much they wish to contribute to the Plan, giving them the desired flexibility they were seeking. If they wish, they can still contribute 20% of employees’ compensation so the employees will receive that 25% total contribution, assuming they have also saved 5% of their own money. Most employees did begin to save 5% to ensure they received the full match.
The owners can now save the maximum allowed into a 401(k), $18,000 for Deb and $24,000 for Sue because she is over 50. Plus they will be eligible for Profit Sharing contributions just like the rest of their employees. A Roth-savings feature was added to allow all participants the choice between saving their money before tax (Traditional) or after tax (Roth). All of the funds are now considered when determining the fees, which provided over 1% in savings in most accounts.
Bottom Line: Deb and Sue were very happy to have their initial goals met plus more. They have some employees who have significantly increased their savings as well, now that they have the option. This emphasized our tagline of With Your Interest in Mind! It confirmed that working to meet client goals can not only serve the client, but in this case, their employees as well.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities. (1) Names have been changed to protect the identity of the client.