By Frederick A. “Rick” Fisher, MS, CFP®
For years, 401(k) plans have been the go to plan for many small businesses. However, from my experience, many small business owners have been less enthused about the plans due to high fees, complex rules and potential contribution limitations.
In 2005, the SIMPLE IRA was created. This new plan, which was designed for businesses with 100 or fewer employees, simplified the rules and could be administered without the services of Third Party Administrators (TPA), which are needed to keep 401(k) plans in compliance with complex ERISA rules. This fact greatly reduced the overall cost of the plans, while only giving up some of the benefits of the 401(k).
To illustrate, I want to introduce Steve and Kyle. They are partners in a business that they formed 10 years ago out of their garage. Until now they only had enough discretionary money to fund individual IRA and Roth IRAs, which have a limit of $6,000 as of 2014. Today, their incomes and tax liability has grown to the point that they want to contribute substantially more to their retirement accounts, but are wary of the costs and complexities of traditional 401(k) plans. Steve reached out to us and wanted to know if we had any viable alternatives. We responded by sending information on a SIMPLE IRA plan offered by one of the larger Mutual Fund companies.
The information illustrated that each participant can defer up to $12,500 of their salary annually and then receive up to a 3% match of their total compensation. For example, if a participant has an annual income or $80,000, they can defer $12,500, and then receive a 3% match ($2,400) from their employer. For a total contribution of $14,900, and also decrease their taxable income to $68,000.
For participants, who cannot yet defer the maximum, as long as they defer at least 1 to 3%, they will be entitled to some sort of match, depending on which option the employer chose. In this case, since the company has steady cash flow, they chose to do an annual match of up to 3%. Therefore a participant who makes $30,000 can receive a match up to $900, as long as they defer 3% of their annual compensation. For participants who are 50 or over the deferral maximum increases to $15,500, but the match provisions remain the same.
For small company owners who want to offer themselves and their employees a retirement solution that is easy to administer, has a low cost, and allows higher contribution limits than traditional and Roth IRAs, the SIMPLE IRA is a great place to start.
For more information on SIMPLE IRAs and other retirement plan alternatives give our office a call. Remember when it comes to building a retirement nest egg, the time to start is now, and to contribute as much as you can for as long as you can. Or in other words, save early, save often.
About Rick Fisher
Rick Fisher is a financial consultant offering comprehensive financial planning and investment management with Ostrofe Financial Consultants, Inc. in Grass Valley, California. His goal is to help clients prepare for retirement and pursue their financial dreams in a fun and personal way. Rick serves clients in 15 states, though most reside in California, including the greater Sacramento, Los Angeles and San Diego areas.
Credentials and Experience
Rick holds FINRA Series 7, 63, 65, 24, and 51 licenses and is supported by Ostrofe Financial Consultants and National Planning Corporation. He also holds his California Insurance License and the designation of CERTIFIED FINANCIAL PLANNER™ professional (CFP®). The CFP® designation is awarded to experienced financial professionals who pass an examination and pledge to abide by a strict code of ethics. He holds himself to their high standards of integrity, objectivity, professionalism and confidentiality. Please note: NPC does not render tax or legal advice.
How Rick Can Help
Rick strives to take the fear and stress out of financial planning. He works with clients to uncover financial issues they may not have known about or have not yet addressed. Rick and the Ostrofe Financial Consultants team are there to answer questions, guide clients towards their goals, and help them feel confident in their future. To learn more about how Rick may be able to help, call his office at 530-273-4425.