Are you considering setting up a retirement plan for your employees? It can be a smart move, as employees consistently name retirement plans as one of the benefits they regard as most important. Social Security is highly unlikely to cover their financial needs in retirement, so employees recognize the need to save for retirement themselves.
While that may not be a surprise, here’s something you may not know: As important a benefit as a retirement plan is to employees, it can also have highly tangible benefits for a business owner as well.
At PAX Financial Group, we offer full service financial services for both individuals and business owners. In addition to working on a business owner’s exit plan, we are also often asked about employee benefits. There are 5 specific benefits to providing retirement plans to your employees that help you as both an employer and a person.
The first benefit to you as an employer is the positive effects offering a sought-after benefit like retirement plans has on your company. The hiring and training process can cost you both in money and in time. As a result, employers like to increase employee retention, so their hiring and training costs are minimized.
Because retirement plans are popular, they can be part of a package that makes employees want to stay.
The second benefit is closely related: Employees are far more likely to stay engaged and motivated if they feel that they are being treated fairly and well. A good benefits package, including retirement plans, is key to making them feel well-treated. Healthcare coverage and bonuses are also elements employees say they appreciate and look for in an employer.
For more on how you can provide these benefits to your employees without breaking the bank, contact the team at PAX Financial Group. We can take a look at your situation and discuss your options in detail.
As a business owner, it’s important to take every step possible to lower Uncle Sam’s tax bite. Retirement plans can be extremely helpful in this regard.
Many company retirement plans are set up so that employers contribute to them. (Some, like 401(k)s, are set up so that employees contribute either along with the company or solely.) Any employer contributions to retirement plans are tax-deductible.
In addition, the value of the assets in the retirement plan, such as stocks and mutual funds, interest, dividend reinvestment, and capital gains, can advance tax-free. In other words, if the stocks held in the company’s retirement plan increase 25 percent in value in a given year, that increase all takes place tax-free.
Retirement plans offer multiple strategies to assist you in the cashflow management of your business.
First, several retirement plan types offer tax credits and other benefits that can lessen business costs and help you manage variable cashflow.
In addition, some plan types allow you to increase contributions in a given year, which can be a tax-minimization strategy, and to skip contributions for a certain period of time. This allows you to avoid cash outlays for retirement plans in a lean year, for example, but pick them up again once the business is robust again.
When you’re considering a retirement plan for your employees, don’t ignore the fact that you work for the company as well! You will be eligible, of course, for any retirement plan you choose, as well as all offer benefits you offer to your team.
Individual retirement plan contributions are tax-advantaged. Many contribution types, such as 401(k)s, are taken out pre-tax, which shelters that portion of your income from taxation entirely in the year of contribution. Other types of contributions may be tax-deductible in the year of contribution.
All contributions, appreciation, dividend reinvestment and capital gains grow tax-free until they are withdrawn at retirement.
Second, many company retirement plans offer the ability to contribute much more of your salary to the plan in a year than the most common self-directed retirement plan, the Individual Retirement Account (IRA). The maximum annual contribution to an IRA for 2021 is $6,000, with an additional $1,000 allowed if the contributor is 50 or over. But the maximum for an annual 401(k) contribution is $19,500, with an additional catch-up of $6,500 for those 50 or over.
As the employer, you enjoy the same tax-free growth of appreciation, interest, dividends and capital gains as your employees until you withdraw the funds in retirement. If you want to maximize your own contributions and tax savings at a higher level, choosing the right plan allows that.
Contributions to some small business retirement plans are even higher. The Simplified Employee Penson (SEP) Individual Retirement Account (IRA), for example, allows contributions of up to 25 percent of annual income, which may be more than the 401(k) limit, depending on your salary. (SEP IRA contributions are set and made by the employer. Note that all percentage contributions for employees must be the same, so if you want to contribute 25 percent, you must contribute 25 percent of each employee’s salary to the retirement plan.)
Bear in mind that the considerations for your company and for you as an individual are quite separate. It’s prudent to work with a financial advisor who understands the unique concerns business owners face, so you choose a plan that will provide maximum benefits to your company, you and your employees.
Financial planning for business owners can be particularly complex. At PAX Financial Group, we offer full service financial services for business owners, so we can help you establish the right plan for you and your business as well as provide ongoing management of the plans. Locally owned and operated, we offer financial planning for business owners in San Antonio and nationwide. For more on what this looks like, schedule a no-obligation conversation with our team, and get the conversation started.
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