Home Posts tagged Retirement-plan
Banking and Financial Services

Saving Grace

By Barbara Trombley, CPA

 

With a labor shortage and looming recession, attracting the right employee is more important than ever. Many small businesses are struggling to find qualified candidates.

Other than wages and healthcare, how can you make your business more attractive to a potential worker? Often, a retirement plan is the answer.

With the absence of traditional pensions today, the onus for retirement is on the employee. Many small-business owners may feel a personal responsibility to enable their employees to fund a retirement. Not having one at all can certainly be a deal breaker for many applicants.

The ability to save, directly from a paycheck, is very attractive. But what plan should you offer, and what are the costs? What are the benefits of the different types of plans?

The most common type of plan is a 401(k). You need only one employee to set up a 401(k). The biggest advantage to this plan is the high level of salary deferrals that it allows. The limit for 2023 is $22,500 with a $7,500 catch-up contribution for those over age 50. Many plans can offer both pre-tax contributions and post-tax (Roth) contributions. There are many investment choices that are possible in a 401(k) plan. Also, many plans are associated with a financial advisor who will offer education to your employees, possibly helping them save more for retirement.

“Other than wages and healthcare, how can you make your business more attractive to a potential worker? Often, a retirement plan is the answer.”

Barbara Trombley

Barbara Trombley

One drawback is that a 401(k) plan can be one of the more expensive types of plans to set up and maintain. The plan needs to be either a safe-harbor plan, where the employer must make a specified matching contribution or automatically deposit 3% of the employee’s salary into the plan (any contributions made by the employer are tax-deductible), or the plan needs to be tested each year to ensure that the plan does not discriminate against highly compensated employees.

In the past, this type of plan had to be offered to all employees over 21 years of age who work at least 1,000 hours. The rules are changing to allow some part-time workers to participate. In my opinion, a 401(k) plan is the most advantageous plan to the employee but may cost the employer more in administration, setup fees, and safe-harbor contributions compared to other plans.

Another popular plan for employers is the SEP plan. Again, this plan can be offered by businesses with more than one employee. The main difference between the SEP plan and a 401(k) is that SEP contributions are made only by the employer; there are no employee contributions. This type of plan is very simple to set up and does not have testing requirements. The maximum annual contribution is 25% of salary, up to a limit of $66,000. The employer has to make the same percentage contribution for each of his or her employees.

The benefit of this plan is that it is very simple to set up; the drawback to the plan is that the business owner needs to make all of the contributions, which may not be economically feasible. As an advisor, I often see a solo business owner having this type of plan.

What if a business owner does not want the complexity and costs of a 401(k) and does not want to fully fund a retirement plan like the SEP? A Simple Plan may be the answer. A Simple Plan can be offered by a business with fewer than 100 employees. There is no annual filing, and you usually use a financial advisor to set it up and choose the investments.

The limit for an employee’s contribution is $15,500 in 2023, or $19,000 if the employee is over age 50. The reductions can come directly from payroll, and the employee can decide how much to contribute. The employer must either contribute 2% of each employee’s compensation or match 100% of employees’ contributions up to 3% of their salary (which can be lowered to 1% in any two of five years). This plan is attractive to many small-business owners as the administration overhead is drastically reduced compared to a 401(k), and there is a relatively small matching contribution that needs to be made.

Lastly, I have helped a few small businesses set up a Payroll Deduction IRA. This is the perfect solution for an owner that would like to enable their employees to save for retirement but may not have the funds for matches or administration. In this type of plan, the employee can contribute up to the Traditional IRA limit ($6,500 if under age 50 and $7,500 if over), with the funds drawn directly from their paycheck. There are no setup fees for the business owner and no employer matches or testing requirements. The employees own their account if they change jobs. Many people are eligible to contribute to a Traditional IRA, but having the deduction made through payroll makes the plan more accessible.

As an additional motivation for a small business to set up a retirement plan, the federal government has been increasing the incentives to the business owner with tax credits. The owner can deduct up to 50% or $500 of plan startup and administration costs for the first three years of the plan. Additional tax credits may become available as our government continues to encourage retirement saving. Consult your financial advisor or an employee-benefits specialist to set up a plan.

 

Barbara Trombley is a financial planner with Wilbraham-based Trombley Associates Investment and Retirement Planning; (413) 596-6992. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this education material.

Banking and Financial Services

Saving Grace

By Barbara Trombley, MBA, CPA

 

The Internal Revenue Service has announced one of the biggest jumps in decades to the cap on 401(k) contributions. Americans will be able to save 10% more in their plans by making pre-tax contributions if they take full advantage of the new cap. The new limit is $22,500, up from $20,500 in 2022, and is applicable to all 401(k), 403(b), and other tax-advantaged savings plans.

Remember, a pre-tax contribution to a plan lowers your taxable income by the same amount in the tax year the contribution is made. The new caps also apply to Roth 401(k) or post-tax contributions (if your plan allows). The tax benefits to Roth 401(k) plans do not occur in the year the contribution is made, but later, when distributions are taken tax-free after the age of 59½.

Barbara Trombley

Barbara Trombley

“Many contributors wonder about the future of Social Security; this future will have to be addressed someday by our government. Currently, according to the Social Security website, the trust fund will run out in 2037.”

If an employee is age 50, they can also make a catch-up contribution. This limit has increased to $7,500 from $6,500 in 2022. This means an employee over the age of 50 can put up to $30,000 in their retirement plan this year with federally approved tax benefits. The IRS seems to be responding to the wave of inflation that has impacted the world and is encouraging Americans to save more for retirement.

Contribution limits to traditional IRAs and Roth IRAs will increase $500 to $6,500. Catch-up contributions to those over age 50 are not subject to annual cost-of-living increases and will remain at $1,000. If the taxpayer is not covered by a retirement plan at their place of employment, traditional IRA contributions are fully deductible. If the employee is eligible for a retirement plan at their place of employment, then the deductibility of a traditional IRA contribution is subject to earnings limits that can be found on the IRS website. The contribution may be fully, partially, or not deductible. Income limits also apply to the eligibility of Roth IRA contributions if the employee is covered by a retirement plan at work.

Building a robust retirement plan takes time but is imperative to supplement Social Security or pensions in retirement. Taking risks at a younger age by investing mostly in equities has historically been the best way to beat inflation and take advantage of compounding.

Compounding occurs when investments in assets generate earnings, and those earnings are reinvested, and they generate earnings. For example, a $10,000 initial investment that generates 10% annually for 25 years would grow to almost $110,000.

Strive to save at least 10% of your paycheck in a workplace retirement plan to build a nest egg to supplement other streams of income in retirement. Diligently saving and investing over a long period of time by making regular, monthly contributions into a retirement plan that includes the appropriate allocation of equities for your age is a great way to save for the future.

Speaking of Social Security, most people have heard of the large cost-of-living increase coming in 2023. The Social Security Administration has announced an 8.7% cost-of-living increase for 2023. All recipients, including future recipients, will benefit from this raise.

It is imperative to understand that Social Security was never intended to be the main source of retirement income for retirees. It was signed into law by President Franklin D. Roosevelt and was designed as a social insurance program to provide a minimum amount of security to workers that have contributed. It has evolved over the years to provide disability, widow’s and children’s benefits for a deceased earner, and other benefits.

Many contributors wonder about the future of Social Security; this future will have to be addressed someday by our government. Currently, according to the Social Security website, the trust fund will run out in 2037. At that time, current payroll tax collections will cover 76% of the benefits that will be paid out. Either benefits will have to be cut, payroll taxes increased, or the age at which a worker becomes eligible increased — perhaps a combination of all three.

Take responsibility for saving for your own retirement and utilize the generous tax benefits that qualified retirement plans provide.

 

Barbara Trombley, MBA, CPA is an owner and financial consultant with Trombley Associates. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material was created for educational and informational purposes only and is not intended as ERISA tax, legal, or investment advice.

Wealth Management

Shared Expertise

Empower Retirement and Massachusetts Mutual Life Insurance Co. (MassMutual) announced they have entered into a definitive agreement for Empower to acquire the MassMutual retirement-plan business. The acquisition will capitalize on both firms’ expertise, provide technological excellence and deep product capabilities, and create scale to the benefit of retirement-plan participants and their employers.

Based on the terms of the agreement and subject to regulatory approvals, Empower will acquire the retirement-plan business of MassMutual in a reinsurance transaction for a ceding commission of $2.35 billion. In addition, the balance sheet of the transferred business would be supported by $1 billion of required capital when combined with Empower’s existing U.S. business.

The MassMutual retirement-plan business comprises 26,000 workplace savings plans through which approximately 2.5 million participants have saved $167 billion in assets. It also includes approximately 2,000 employees affiliated with MassMutual’s retirement-plan business who provide a full range of support services for financial professionals, plan sponsors, and participants.

“Empower is taking the next step toward addressing the complex and evolving needs of millions of workers and retirees through the combination of expertise, talent, and business scale being created,” said Edmund Murphy III, president and CEO of Empower Retirement. “Together, Empower and MassMutual connect a broad spectrum of strength and experience with a shared focus on the customer. We are excited about the opportunity to reach new customers and serve even more Americans on their journey toward creating a secure retirement.”

“We believe this transaction will greatly benefit our policy owners and customers as we invest in our future growth and accelerate progress on our strategy.”

The transaction, expected to close in the fourth quarter of 2020 pending customary regulatory approvals, will increase Empower’s participant base to more than 12.2 million and retirement-services record-keeping assets to approximately $834 billion administered in approximately 67,000 workplace savings plans.

“In Empower, we are pleased to have found a strong, long-term home for MassMutual’s retirement-plan business, and we believe this transaction will greatly benefit our policy owners and customers as we invest in our future growth and accelerate progress on our strategy,” said Roger Crandall, MassMutual chairman, president, and CEO. “This includes strengthening our leading position in the U.S. protection and accumulation industry by expanding our wealth-management and distribution capabilities; investing in our global asset-management, insurance, and institutional businesses; and delivering a seamless digital experience — all to help millions more secure their future and protect the ones they love.”

The MassMutual retirement-plan business has grown substantially over the past decade, with the number of participants served doubling to more than 2.5 million and assets under management more than quadrupling from $34 billion to more than $160 billion.

The combined firm will serve retirement plans sponsored by a broad spectrum of employers. These include mega, large, mid-size, and small corporate 401(k) plans; government plans ranging in scale from state-level plans to municipal agencies; not-for-profits such as hospital and religious-organization 403(b) plans; and collectively bargained Taft-Hartley plans. The transaction will also bring MassMutual’s defined-benefit business under the umbrella of plans Empower serves.

Empower and MassMutual intend to enter into a strategic partnership through which digital insurance products offered by Haven Life Insurance Agency, LLC3, and MassMutual’s voluntary insurance and lifetime income products will be made available to customers of Empower Retirement and Personal Capital.

Empower today administers $667 billion in assets on behalf of 9.7 million American workers and retirees through approximately 41,000 workplace savings plans. Empower provides retirement services, managed accounts, financial wellness, and investment solutions to plans of all types and sizes, including private-label record-keeping clients.

In August, Empower announced it had completed the acquisition of Personal Capital, a registered investment adviser and wealth manager. The Personal Capital platform offers personalized financial advice, financial planning, and goal setting, providing insights and tools for plan participants and individual investors. In addition, Empower’s retail business provides a suite of products and services to individual retirement-account and brokerage customers.

Accounting and Tax Planning Special Coverage

By All Accounts

By Jim Moran CPA, MST

Jim Moran CPA, MST

Jim Moran CPA, MST

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided taxpayers affected by COVID-19 with some relief in the area of retirement-plan distributions and loans.

A coronavirus-related distribution is allowed by a qualified individual from an eligible retirement plan made from Jan. 1, 2020 to December 31, 2020, up to an aggregate amount of $100,000. A qualified individual must meet one of these criteria:

• Diagnosed with the virus SARS-CoV-2 or with the coronavirus disease 2019 (COVID-19) by a test approved by the Centers of Disease Control and Prevention (CDC);

• Spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC;

• Experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19; or

• Experienced adverse financial consequences as a result of closing or reducing hours of a business that is owned or operated by the individual due to the SARS-CoV-2 or COVID-19.

An ‘eligible retirement plan’ is defined as the type of plan that is eligible to accept tax-free rollovers. It includes 401(k) plans, 403(b) plans, governmental 457 plans, and IRAs (including SEP-IRAs and SIMPLE-IRAs). It does not include non-governmental 457(b) plans. The $100,000 withdrawal limit applies in aggregate to all plans maintained by the taxpayers.

For individuals who are under age 59½, the act waives the 10% early-withdrawal penalty tax. Although the 10% penalty will be waived, any potential income taxes associated with the retirement plan or IRA withdrawal will still be assessed. The act also suspends the 20% tax-withholding requirements that may apply to an early distribution from a 401(k) or other workplace retirement plan.

“Your tax liability owed to the IRS at the end of the year may be higher than expected if you choose not to withhold the suggested 20%.”

Just keep in mind, your tax liability owed to the IRS at the end of the year may be higher than expected if you choose not to withhold the suggested 20%.

When it comes to paying the resulting tax liability incurred due to the coronavirus-related distributions, the CARES Act allows you a couple of options: spread the taxes owed over three years, or pay the taxes owed on your 2020 tax return if your income (and, thus, your tax rate) is much lower in that year.

Taxpayers may also repay the coronavirus-related distributions to an eligible retirement plan as long as the repayment is done within three years after the date the distribution was received. If the taxpayer does repay the coronavirus-related distribution in the three-year time period, it will be treated as a direct trustee-to-trustee transfer so there will be no federal tax on the distribution. This may mean an amended return will have to be filed to claim a refund attributable to the tax that was paid on the distribution amount that was included in income for those tax years.

Retirement-plan Loans

Loans from eligible retirement plans up to $100,000 to a qualified individual are available for any loans taken out during the six-month period from March 27, 2020 to Sept. 23, 2020. This is up from the previously allowed amount of $50,000.

Participants must repay standard retirement-account loans within five years. The CARES Act allows borrowers to forgo repayment during 2020. The five-year repayment clock begins in 2021. The loan will, however, continue to accrue interest during 2020.

If you have an existing loan outstanding from a qualified individual plan on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020 to Dec. 31, 2020, the due date for any loan repayments are delayed for up to one year.

Employers may amend their plans for the above hardship provisions to apply no later than the last day of the plan year that begins on or after Jan. 1, 2022 (Dec. 31, 2022 for a calendar-year-end plan). An additional two-year window is allowed for governmental plans; however, IRS Notice 2020-51 clarifies that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions are not yet amended.

Administrators can rely on an individual’s certification that the individual is a qualified individual (and provides a sample certification), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment. IRS Notice 2020-50 provides employers a safe-harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes there may be other reasonable ways to administer these rules.

Please note that the loan provisions apply only to qualified plans such as 401(k), 403(b), and governmental 457 plans; loans may not be taken from IRAs.

Each retirement plan’s rules and requirements supersede the CARES Act. In addition, it is important to remember that not all retirement-plan sponsors allow loans. Before taking out any loan, it is important to check that your employer’s plan adopts these provisions.

Suspension of RMDs

The CARES Act has suspended required minimum distributions (RMDs) for 2020. Individuals over age 70½ (for those born prior to July 1, 1949) or 72 (for those born after July 1, 1949) were required to take a minimum distribution from their tax-deferred retirement accounts.

Most non-spousal heirs who inherited tax-deferred accounts were also required to take an annual RMD. Under the CARES Act, RMDs from qualified employer retirement plans such as 401(k), 403(b), and 457 plans, will be waived. Even those individuals not affected by the coronavirus can waive the RMDs.

For individuals who have already taken their 2020 RMD, the CARES Act allows you to put it back into your retirement account. IRS Notice 2020-51 qualifies the distribution as an eligible rollover distribution if repaid in full by Aug. 31, 2020.

Jim Moran is a tax manager at Melanson, advising clients on individual and corporate tax matters; [email protected]