Bookkeeping Services and Retirement Plans. For
many small business owners, retirement plans are often seen as simply a benefit
they should provide for their employees. However, your bookkeeping services
provider can give you valuable direction in this critical decision. It pays to
choose wisely, as many retirement plans can offer substantial benefits for you
as the business owner, as well.
With a good retirement plan you can:
While it is true that many businesses are choosing to forego such benefits, it would be far more strategic to weigh the benefits against any perceived costs before deciding against a retirement plan for your staff.
As a business owner, you already do a great deal for your employees through their salaries, any medical care options you provide, and – if your company is large enough - paid sick leave and vacation time. In light of what you do to elicit their loyalty as employees, it makes good business sense to offer a retirement plan that will help them later on in their retirement.
The other benefits noted previously include the fact that a retirement plan is an excellent tool for attracting and keeping valuable employees, and as a financial tool to trim your tax bill. This is possible since establishing an employee retirement plan can offer tax benefits:
you can have the opportunity to invest in your own retirement by investing money
in the same plan you set up for your employees.
There are entire books on the subject and one post cannot hope to cover everything you may want, or need, to know about selecting and offering a retirement plan. But we have provided a short list of seven items of particular importance that can get you on the right path:
1. There are different types of retirement plans and you want to shop around carefully.
Many small business owners don’t realize that there are a wide variety of retirement plans and retirement plan features and some can benefit business owners more than others. For many, it seems that a 401(k) is the standard option, but it pays to investigate your options. Some of the lesser known retirement plans and plan features include profit sharing plans, integrated plans, cross-tested plans, safe harbor plans, defined benefit plans, among others. Finding a qualified financial advisor specializing in small business needs is recommended. A good advisor will help you in choosing and configuring the best plan for your needs and your business.
2. A 401(k) plan is not always the best choice to meet your own needs as a business owner.
While 401(k) plans are the most commonly known retirement plan for both employees and small business owners, it is not always a sufficient vehicle for needs of the owner. There are usually limits on the maximum amount that can be contributed into the accounts.
This usually applies to the owners, as well, and in many situations owners find they cannot put as much money into a 401(k) plan for themselves as they might like or can afford. In addition, as an owner, your own contributions can also be limited by insufficient contributions from your employees into the 401(k) plan. So the point of this tip is to hold off choosing a 401(k) until you’ve had an opportunity to be educated on your other options.
3. Retirement plans can enable owners to take money out of their business on a pre-tax basis.
It has been determined that most business owners have anywhere from 50-90% of their net worth tied up in their businesses. One of the dilemmas facing many owners is the need to access the wealth they have invested in their businesses so they can then convert that to liquid assets.
The problem for these owners is that by taking cash out of their business as compensation or dividends usually incurs higher incomes taxes in the current tax year. However, many retirement plans can enable them to divest money from the business without paying taxes until actual retirement.
In addition, the funds invested into retirement plans grow on a tax deferred basis. This means that no taxes are paid on the investment growth over time. Taxes are only paid at the time the proceeds are withdrawn from the plan such as after the owner has retired from the business.
4. Many retirement plans allow different limits on different employees.
A common misconception about retirement plans is that the business owner must receive the same benefit as all of the other employees within a retirement plan. While this is true with certain plans, it is not the case with every plan option. It is true that all retirement plans must comply with federal “anti-discrimination” regulations. These regulations ensure that all rank and file employees receive proportionate benefits from the plan.
The good news is that some types of plans permit higher current contributions, or increased benefits, for certain participants, such as older employees or more highly paid employees. Since the business owner is often one of the oldest and most highly compensated employees this benefit can be a significant factor.
5. Some retirement plans allow an owner to take significant amounts out of the business on a pre-tax basis.
Traditional plans, such as a 401(k), limits participant to a set amount they can defer into a 401(k) account--$18,000 in 2015 ($24,000 if the participant is age 50 or older.) However, some retirement plans have different limits to how much money can go into the plan annually for each participant, or how the amount to be provided to a participant once they reach retirement age.
For example, some plans, such as profit sharing plans, can permit employee contributions up to $53,000 per year, or as much as $59,000 for participants that are 50 or older. Defined benefit plans such as pension plans can create annual contributions of several hundred thousand dollars per year.
6. Your bookkeeping services vendor will tell you your retirement plan is important in your exit planning.
Choosing the right retirement plan will provide you with the means to take money out of the business on a pre-tax basis prior to your exit whether you are “retiring” or simply moving on. The value of this option is that it reduces your dependency on your business for income. This can also mean reduced risk while broadening your exit options. Retirement plans can also benefit you after you have left your business.
When selling a business, for example, it’s typical for the buyer to include a consulting agreement in the terms for the owner who is selling. However, if the owner doesn’t need that income from the consulting payments, this income can be put into a retirement plan instead.
7. Retirement plans offer strong creditor protection for the owner’s assets.
Another factor that your bookkeeping services advisor can explain is how to best protect your business and personal assets from creditors should this type of situation arise. Because retirement plans offer such immense asset protection this is often considered a great method for safely investing an owner’s assets.
current federal law, most creditors cannot take assets from retirement plans
with a few exceptions, such as the IRS actions and possibly alimony and child
support payments. This broad form of protection makes retirement plans one of
the best ways to protect a business owner’s wealth.
Keep in mind that actual retirement planning, plan design, and the specialized advice that is required may not be something your bookkeeping services can provide. Nonetheless, the odds are quite good that he or she can not only give valuable direction, but can also guide you to a reputable retirement planning provider or financial services provider who specializes in retirement planning.
all the employee benefits you can offer your own staff, a good retirement plan
is one that can benefit you as the owner, as well.
Stephanie Horne is an experienced bookkeeper and Enrolled Agent. She is the owner and founder of Horne Financial Services in Rohnert Park, California along with this website and has over 20 years of in person, virtual and outsourced bookkeeping/accounting and tax preparation experience with businesses of all sizes.
Her love and passion is to work individually with business owners and families to help alleviate any financial stress or concerns by helping them to understand and have better control of their income, expenses, cash flow, and tax liabilities. She can be reached through her Horne Financial Services Facebook page as well.
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