ACCOUNTING – ON TAP

 
BE PREPARED: RETIREMENT PLANNING BEGINS WITH SAVING AND SELECTING THE RIGHT PLAN

(reprinted with the permission from Dan Bergs, CPA- with Wegner CPAs LLP offices in Madison, Baraboo, Waukesha and Janesville – this was recently printed in the “On Premise” magazine - July/August 2019 Issue.)

  Retirement. That one word can pack quite the punch. It can mean excitement, freedom and adventure for some, while for others it can mean feat, anxiety or depression. There are many ways to prepare for retirement; one important way is to make sure you have a financial plan. Many individuals have not saved adequately for retirement. At the very least, many will be disappointed to learn when they can retire (later) and how their standard of living after retirement may be impacted.

  This situation has developed over the last few decades as pension plans have disappeared. The savings responsibility has shifted from an employer pension to the individual saving money through a qualified retirement plan. There are several retirement plans to choose from and the best option depends on your scenario.

TYPES OF RETIREMENT PLANS TO CONSIDER

  Qualified retirement plan contributions are tax deductible by the employer and tax deferred to the employee unless contributions are via a Roth contribution. The most common types that work well with family businesses are 401(K) plans, SEP (Simplified Employee Pension) IRAs and SIMPLE (Savings incentive match plans for employers). Each of these plans have different rules and contribution limits. All of these plans allow catch-up contributions for individuals over age 50 or older by year-end.

  Many family businesses use 401(k) plans. These plans have a higher contribution limit for employees and also allow for Roth contributions. These plans often have profit-sharing components that can help business owners contribute more to their plans as long as employees have a certain percent match. This can be a win-win as employees receive a match on their contributions based upon their wages and business owners have opportunities to contribute more into their retirement plans. One downside to the 401(k) plans is they are more expensive to maintain than the SEP IRA and SIMPLE IRA plans.

TAXING RETIREMENT SAVINGS

  A Roth contribution is an after-tax contribution to a retirement plan. Here’s an example: An employee making a $1,000 Roth 401 (k) contribution pays tax on the $1,000 now and can withdraw the $1,000 contribution plus growth tax-free retirement (over 59-1/2 years of age).

  A traditional 401 (k) contribution reduces the taxable income of the individual and is taxable when distributions are taken in retirement (over 59-1/2 years of age)

POPULAR PLANS FOR SMALL BUSINESSES

  SEPs and SIMPLE plans are popular because they do not have difficult or expensive annual reporting requirements. They are easy to set up. SEP IRAs do not have an employee contribution components=; the employer contributes a percent of employee wages up to 25%, and 20% for self-employed individuals (not to exceed $55,000 per individual in 2018). Employers do not have to contribute every year, so when profits are down you are not obligated to fund the plan. SIMPLE IRAs include employee deferrals and employer matches to the plan. Employers match up to 3% of employee wages for fully participating employees, but there is flexibility in employer matching contributions.

  There are other options available depending on the profitability of each company. Every business and situation is unique. Please check with your advisor on which type of plan might be appropriate for your situation. Above all, do something. Your employees will appreciate it and you will appreciate it as well. You cannot afford to wait! TLW

Dan Berg, CPA, is a supervisor in the Tax & Business Services Department with Wegner CPAs, LLP; Wegner CPAs LLP has offices in Madison, Baraboo, Waukesha and Janesville.

This article is not intended to give complete tax advice, but a general review of the subject matter. You can contact Dan at 608-442-1986 or This email address is being protected from spambots. You need JavaScript enabled to view it..