The U.S. Bureau of Labor Statistics (BLS) reports that, when it comes to businesses in the health care industry, only 49 percent offer some type of retirement benefit.
Additionally, when offered this perk as a benefit of employment, roughly 77 percent of employees choose to take part in the retirement plan. These numbers suggest that employees today are starving for some type of employer-sponsored retirement plan, yet less than half actually have this as an option.
Then there’s the fact that small business owners have their own retirement to worry about as well. According to a 2015 TD Ameritrade self-employed survey, 55 percent of individuals who are self-employed don’t feel as if they have enough money in their own retirement accounts, causing around half to plan to rely on Social Security benefits to some extent once they’re ready to hang up their work shoes.
However, if you choose to be the small business owner who wants to help your employees and yourself enjoy a better life after retirement, one way to do this is to set up an effective retirement plan.
This involves two things: 1) striving to meet two objectives, and 2) modeling and calculating pre- and post-tax benefits.
Strive to meet two objectives
Vic Patel, founder of Forex Training Group, says, “Small business owners have several retirement plan options from which to choose. In considering the best options for their business, business owners need to keep two primary objectives in mind: Their business objectives and their personal financial objectives. The retirement plan option they choose for their business should attempt to achieve both.”
Business objective considerations, according to Patel, include:
- How fast you expect to grow
- The number and types of employees, as well as how much they’re paid
- What it takes to retain highly compensated key employees
- What you need to do to attract new employees
- Whether you have predictable, steady, and growing profits
- Knowing whether you have the capacity to administer an employer-sponsored plan or if you need a more simplified plan
Patel says that personal retirement considerations can be realized by asking yourself the following questions:
- Is your compensation much higher than the other employees?
- What is your current and projected tax situation?
- Are you concerned with maximizing your own contributions?
“The answers to these questions are important for narrowing down plan options,” says Patel, adding that, “As with any tax-related issue, it’s highly advisable to seek the guidance of a tax professional experienced in qualified retirement plans when exploring your options.”
Model and calculate pre- and post-tax benefits with available plans
Mathew Dahlberg, CFP, EA, owner of Main Street Investments, agrees that establishing objectives as a small business owner is critical when creating an effective retirement plan. However, you must also consider tax-based ramifications as well.
“Small business owners must correctly model and calculate all of the pre- and post-tax benefits of each plan,” says Dahlberg, “with such considerations as the business structure, its marginal tax rate, their marginal tax rate, their age, their length of tenure with the firm, deductibility of plan contributions (at federal, state and city level) and assumptions about future Social Security benefits and future tax rates. In other words, the math of the plan choices must be quantified in real dollars.”
Sound overwhelming? Apparently you’re not alone. “The difficulty of making such a calculation (or range of possible outcomes, more to the point) precludes most small business owners from even making an educated guess regarding each type of plan,” says Dahlberg. This is where working with someone who can help you figure all of these things out can help you collect and understand the data you need to make the best decision possible tax-wise.
With this in mind, Dahlberg suggests that you also not overlook a key possible tax credit geared toward small businesses: the Credit for Small Employer Pension Plan Startup Costs. “While I do wonder if the credit’s lack of popularity may have to do with the length of its name,” Dahlberg jokes, “in all seriousness I cannot believe the number of financial and tax professionals that aren’t aware of it, let alone its rules and potential benefits. This credit can be good for up to $1,500 to the employer to defray some or all of the costs of implementing the plan over three years.”
