Meet architect – Anthony – after working for an architect firm for a decade, he now decides to hang out his own shingle. He plans to rent office space and hire an assistant. After putting his projected revenue and expenses on paper for the next five years, he is confident that the business cash flow is healthy, and his bottom- line projects will grow about 15% per year.

Anthony asks which retirement account shall he set up for his new company?

It could be either an IRA, SEP (Simplified Employee Pension) IRA, SIMPLE (Savings Incentive Match Plan for Employees), or a 401k to name a few. Would Anthony like to maximize his owner’s contribution? Would matching employee’s contribution be a burden to him? Would the administration and expense of a retirement account be a concern?

I would need to have a sit-down meeting with Anthony to understand what matters to him the most, and once he has supplied some basic information, such as: all employees’ ages, income level, etc. I would then be able to lay out a few options and discuss which one is most appealing in terms of tax efficiency and makes the most economic sense.

Since the cash flow of the company is projected to be healthy, the $6000 annual IRA contribution is probably not going to help him with retirement savings nor a tax deduction. If he is on board with contributing the same percentage to his eligible employee as to his own, then a SEP IRA plan is easier to manage and less work to maintain. However, if he hires more employees, the company match might become a significant amount. Alternatively, if Anthony sets up a SEP IRA now, he could possibly terminate the SEP IRA and have each plan participant roll over their account to an IRA account, and set up a 401k account when the company’s needs change and he prefers to have more benefits/features of a retirement plan.

Last but not least is a SIMPLE IRA which is generally a good start up plan for a company which has less than 100 employees. Even though the contribution is not higher than other plans such as a 401k plan or SEP, it is fairly easy to maintain and no annual nondiscrimination testing is required.

If Anthony knows for sure that the new practice will make a huge profit, then a 401k plan with a safe harbor is probably the way to go. The 401k safe harbor provision will eliminate the need for the annual non-discrimination testing.

In summary, below is a table listing various retirement plan options:

401(k) plans

SIMPLE IRAs

SEP IRAs

IRAs

Deadline to establish

Plan must be adopted by the last day of the plan year

Usually between January 1 and October 1

Employer’s income tax returns filing deadline (plus extensions)

Any time before individual income tax returns filing deadline plus extension

Contributions

By employee with optional employer match (details to follow)

Employee contribution plus mandatory employer contribution

Employer only (on discretionary basis)

Employee only

Contribution Limits

Maximum contribution limit of $19,500 (with $6,500 catch-up)

Maximum contribution limit of $13,500 (with $3,000 catch-up)

Lesser of 25% of employee’s salary or $57,000

Maximum contribution limit of $7,000 (with $1,000 catch-up)

Investment Decisions

Employee

May be employee

Employee

Employee

Vesting

Employer’s contribution may be subject to a schedule

Immediate

Immediate

Immediate

Ongoing Maintenance

Annual form filing and notices

Annual notice to eligible employees

No annual filings nor disclosures

No annual filings nor disclosure

Annual Non- discrimination Testing

Mandatory (unless a “safe harbor” is elected)

Not required

Top-heavy testing applies

None

Source: American Funds’ “Focus: Retirement Plan Services”

Let’s recap:

If you have employees and you want higher retirement account contribution limits and the flexibility of plan design, a 401(k) plan might be the first one you ought to take a closer look at.

If you want a plan without too much administration effort and relatively lower plan costs than a 401(k) plan, then perhaps a SIMPLE IRA is the one.

When only the employer makes contributions to employee retirement accounts at work, SEP IRA fits the bill.

Lastly, an IRA account by far is the simplest of all, and the employer doesn’t even have to get involved.

No plan is perfect, but the most suitable one does exist and just requires some discussion. Make an appointment with your trusted advisor(s) to figure out the one which suits you and your company the most!

I offer an initial complimentary consultation upon request.

Princeton Forrestal Village
116 Village Blvd, Suite 200
Princeton, NEW JERSEY 08540
Phone: (609) 910-2600

Legal

Terms of Business
Privacy Policy

Disclaimer

This communication is strictly intended for individuals residing in the states of NJ, NY, FL, & SC. No offers may be made or accepted from any resident outside the specific states referenced.
Registered Principal, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and ATO Capital are not affiliated.
When you link to any of these web-sites provided herein, ATO Capital makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.

Check out my background on FINRA's broker check