Business & Personal Financial Planning

401(k) Plan:  Traditional, Roth, or Both

This is the most common type of plan implemented by employers due to its flexibility and scalability.  401(k) Plans are used by many businesses ranging from single, self-employed individuals to Fortune 500 companies with thousands of employees in multiple locations.  The large contribution limits allow participants to defer a little each year, a large amount, or none at all.  The choice is theirs.  Participants can choose their contributions to be tax-deferred (reduces current taxes), Roth-style (tax-free upon withdrawal), or a combination of the two.

The employer can offer incentives for employees to actively contribute to their own plan balance by offering matching and profit-sharing contributions.   These extra contributions are common, but not required.

The 401(k) Plan requires record keeping and compliance with ERISA regulations.  Therefore, there are ongoing administrative costs that need to be considered.  Cost-effective solutions are available to meet these requirements.

SIMPLE IRA

The SIMPLE IRA is a simplified version of the 401(k) Plan specifically designed for employers with 100 or fewer employees.  The contribution limits are smaller, but the administrative requirements are much simpler.  Employees are allowed to defer a portion of their salary payments into their own retirement account.  The employer can offer a match.  The record-keeping requirements are significantly less than that of a 401(k) Plan.

SEP IRA

The Self-Employed Pension (SEP) Plan is another choice available to employers.  The employer makes all contributions to participant accounts out of its own pocket and according to a percentage of employee compensation.  The contribution is discretionary, not required.  The employer has to be very careful to meet IRS requirements for contributions to avoid the plan losing its tax-deferred status.  Although the SEP IRA Plan is easy to set up, it is not as commonly used as the 401(k) Plan or SIMPLE IRA Plan.

DEFINED BENEFIT PLANS

Employers with steady, recurring profits that want to make larger contributions than allowed by the 401(k), SIMPLE IRA, or SEP IRA may consider implementing a Defined Benefit Plan.  With a defined benefit plan the maximum annual contribution for participants is based on the amount of required withdrawals once the employee reaches retirement.

The maximum allowable contributions for a pension plan are much higher than defined contribution plans because fairly conservative estimates must be used in determining a participant’s future pension amount.  The advantage is that the employer can contribute much more to the plan and reduce its tax liability by a larger amount.  The disadvantage is that the employer needs to be committed to consistent contributions to the plan regardless of economic circumstances.

There is a variety of defined benefit plan options to choose from that can be tailored to fit your specific needs.

IRA ROLLOVERS

If you have left a job but still have a balance in your old employer’s 401(k) Plan, you might consider transferring the funds to a Rollover IRA that provides with greater investment flexibility than that provided in the employer’s plan.  We can help you determine what options are available to you and which one makes the most sense for your situation.

PERSONAL RETIREMENT PLAN

Do you know when you will retire and if you will have enough retirement income?  If not, then it would be wise to have us prepare a personalized financial plan that will show you how to accomplish your retirement income goals.  The plan will show if your current savings rate and investment portfolio will generate the capital you need.  The plan will also show deficiencies and what changes that you can make today to ensure you will have enough income for the rest of your life.