Group
Retirement
Plans
Group Retirement Plans
Group retirement plans are the most popular benefit plan for employers. These programs maximize tax benefits and attract, motivate and retain employees. A successful group retirement plan can help you reduce payroll costs, and can also help gather employee input. Allow us to help you administer group retirement plans, providing turnkey online access and ongoing personal support.
From 401(k) to IRA, employee stock ownership plans and more, we can help you select from an array of retirement plans that help maximize tax benefits and attract, motivate and retain employees. Allow us to help you administer plans, providing turnkey online access and ongoing personal support.
Private Sector Employees Can Invest for Retirement With a 401(k) Plan
A company-sponsored retirement plan can be a significant source of income in your later years. When your employer offers a matching contribution, they’re essentially giving you free money. If they will match up to 6 percent of what you contribute, then you should at least be contributing that amount.
What is a 401k?
A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. The underlying plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan. Generally, deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return. With a 401(k) plan, you are in charge of your retirement account. That means you are in charge of how much money you will have in retirement. While that may seem intimidating, the biggest step is simply to start contributing to your plan. And remember, you don’t have to go it alone. A financial planner can help you make decisions that reflect your goals and risk tolerance.
How does a 401k work?
A 401k plan is a benefit commonly offered by employers to ensure employees have dedicated retirement funds. A set percentage the employee chooses is automatically taken out of each paycheck and invested in a 401k account. They are made up of investments (usually stocks, bonds, mutual funds) that the employee can pick themselves.
Depending on the details of the plan, the money invested may be tax-free and matching contributions may be made by the employer. If either of those benefits are included in your 401k plan, financial experts recommend contributing the maximum amount each year, or as close to it as you can manage.
Your contributions are tax-deferred
Your 401(k) contributions are deducted right from your paycheck and go directly into your account before taxes are withheld. So if your salary is $50,000 a year and you contribute $3,000 to your 401(k), you will pay income tax on $47,000 next April instead of the entire $50,000 that you earned. When you withdraw money from your account in retirement, it will be subjected to taxes. But since you’ll be retired, you’ll possibly be in a lower tax bracket. Consider taking full advantage of the tax-deferral by contributing the maximum amount allowed by your company. Check with your human resources department for limits and details. Please keep in mind that all investing involves market risk, including the possible loss of principal.
You may get matching contributions from your employer
Your company may match a certain percentage of your 401(k) contributions – most do. For example, if your company matches 0.5% for every 1% you contribute up to 6%, that translates into an extra 3% in your account if you take advantage of the entire match. With the example above, your $3,000 contribution plus your employer’s match would add $4,500 to your 401(k). (Your company will have rules about when the entire match is yours. Get the details from your employer.)
You can avoid penalties by leaving your money in your
Since 401(k)s are designed to help you save for retirement, there are penalties for taking your money out early. You’ll owe income taxes on the total amount and, if you’re younger than 59½, also may owe a 10% early-withdrawal penalty. Plus, the IRS requires your employer to withhold 20% of your account value to pre-pay at least part of the taxes you’ll owe.
What is 403(b)?
A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees’ accounts.
Employees of companies in the private sector have 401(k) plans to help build their retirement savings. But what exactly is a 403(b) plan? If you’re a school teacher or work for a tax-exempt organization, a 403(b) plan is a tool that may help you reach your retirement goals. 403(b) retirement plans are also known as tax-sheltered (or tax-deferred) annuities.
Key Facts About 403(b) Plans
- Money grows in your account free of capital gains taxes.
- Yearly contribution limits are $19,500 in 2021. Employees ages 50 and older can contribute an extra $6,500.
- Employees who have worked for the same organization for at least 15 years can contribute an additional $3,000 a year, regardless of age.
- You can begin making tax-free withdrawals at age 59.5.
- You must begin taking required minimum distributions by age 72.
Who Is Eligible for a 403(b) Plan?
Not everyone can sign up for a 403(b) plan. For tax reasons, only employees of certain organizations and institutions are eligible to participate.
The following people are eligible to participate in a 403(b) plan:
- Employees of tax-exempt 501(c)(3) organizations
- Employees of cooperative hospital service organizations
- Public school employees who are involved in the daily operations of a school
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences
- Ministers employed by a 501(c)(3) organization
- Self-employed ministers
- Ministers or chaplains who are employed by a non-501(c)(3) organization but who function as ministers in their daily professional responsibilities with their employers
According to the IRS, employers can choose to exclude employees who typically work less than 20 hours per week from participating in a 403(b) plan.
Why 403b?
A 403(b) plan lets you set aside a portion of your salary in an employer-sponsored account to save for retirement. Some employers may also match your contribution. That’s like getting free money for participating in your retirement plan.
You don’t pay taxes on your contributions to the plan, or on any earnings the account accumulates until you withdraw the money – which ideally happens when you’re retired. And by then you may be in a lower tax bracket – so there are potential savings every step of the way.
Our advice
With a 403(b) retirement plan, you can typically invest in fixed annuities, variable annuities or mutual funds. Ask your advisor to help you choose investments that best meet your retirement objectives. Also remember that investing involves market risk, including possible loss of principal, and there’s no guarantee that your investment objectives will be met.
Enrolling in your employer’s 403(b) retirement plan is a big step in preparing for your future. You can start small − the important thing is that you start investing now so your money has time to potentially grow. If your employer doesn’t offer a 403(b) plan, find out if they have another kind of retirement plan. Or ask your investment professional about other ways to start investing for retirement.
Early withdrawals – and why to avoid them
Because 403(b) plans were created to help you save for retirement, there may be harsh penalties for withdrawing money early, including:
- Income taxes on the total withdrawal
- A 10% penalty if you’re younger than 59½
- 20% federal income tax withholding – unless the entire amount is rolled over to another qualified retirement plan or IRA
Prepare for Retirement With a 457 Plan Designed for Government and Non-Profit Workers
Deferred compensation plans, also known as 457 retirement plans are designed for state and municipal workers and employees of some tax-exempt organizations. If you participate in a 457 plan, you can contribute a portion of your salary to a retirement account. That money and any earnings you accumulate are not taxed until you withdraw them.
The difference between a 401(k) and a 457 retirement plan:
Although they’re alike in many ways, there are some differences between 401(k) and 457 plans, particularly when it comes to early withdrawal penalties and minimum required distributions.
With a 457 retirement savings plan:
- There isn’t a minimum retirement age
- There isn’t a 10% federal penalty for early withdrawal of funds, although withdrawals are subject to ordinary income taxes
- There is a withdrawal option for unforeseen emergencies that meet certain legal criteria, if all other financial resources are exhausted
- Distributions are available in a lump sum, annual installments or as an annuity
- There is no tax withholding if you leave for a new job and roll over your money into an IRA or your new employer’s 401(k), 403(b) or 457 plan – or if you take regular installments for 10 years or more. (All other distributions are subject to 20% withholding for federal taxes.)
Keep in mind that federal income tax laws are complex and subject to change. Please consult your attorney or tax advisor for answers to specific questions.
What Is a SIMPLE IRA?
When you run a small business, making sure you’re saving enough for retirement is vital. But with so many different retirement plans to choose from, it can be hard to decide which one is best for you. That’s why it’s important to know what each one offers. If you’re wondering, “What is a SIMPLE IRA?” it turns out it’s what it sounds like. It’s an easy-to-manage savings plan that lets you put tax-deferred money aside for retirement. Money in this account gets invested in a similar way to traditional IRAs.
SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts, is employer-sponsored. This means it is offered to employees through a business. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. Your employees can participate in the plan if they made at least $5,000 during any two previous years and expect to make that much in the current year. SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan.
- Available to any small business – generally with 100 or fewer employees
- Employer cannot have any other retirement plan
- No filing requirement for the employer
- Contributions:
- Employer is required to contribute each year either a:
- Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
- 2% nonelective contribution for each eligible employee:
- Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $275,000 for 2018
- Employees may elect to contribute
- Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money
- Employer is required to contribute each year either a:
Pros and Cons
Pros
Depending on the provider, you may be able to set up a SIMPLE IRA online. If you have to fill out paperwork, it’s generally less than what you’d complete to set up another account, such as a 401(k) plan.
Some retirement plans charge costly fees to open and maintain accounts. With SIMPLE IRAs, your business typically has lower upfront and managing costs.
You and your employees can deduct contributions on tax returns.
Your plan provider handles reporting requirements to the IRS.
Cons
The IRS requires businesses to match employee contributions dollar for dollar, up to a certain percentage.
Other retirement accounts have higher contribution limits. For example, the 2020 contribution limit for 401(k) plans is $19,500 and $6,500 for catch-up contributions.
You can’t withdraw money from your SEP IRA until you reach age 59½. If you take money out before then, you’ll have to pay a 10% penalty and income taxes on your withdrawal.
There’s no option to have a Roth version of your SIMPLE IRA. So, you can’t fund your account with post-tax money to avoid paying taxes when you withdraw the money.
Private Sector Employees Can Invest for Retirement With a 401(k) Plan
A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP stands for Simplified Employee Pension.) Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee’s name. Employees of the business cannot contribute – the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.
Who can participate in SEP or SARSEP Plan?
An eligible employee is an individual (including a self-employed individual) who meets all the following requirements:
- Has reached age 21
- Has worked for the employer in at least 3 of the last 5 years
- Received at least $600 in compensation from the employer during the year (for 2018)
An employer can use less restrictive participation requirements than those listed, but not more restrictive ones.
An employer can exclude the following employees from a SEP or SARSEP:
- Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and the employer
- Nonresident alien employees who do not have U.S. wages, salaries or other personal services compensation from the employer
Set up a SEP-IRA for each employee
A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other qualified financial institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts.
You and your employees will receive a statement from the financial institutions investing your SEP contributions both at the time you make the first SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the expiration of a specified period of time.
Timing of setting up a SEP Plan
You can set up a SEP for a year as late as the due date (including extensions) of your business income tax return for the year you want to establish the plan.
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