All of us will eventually reach that age or time that we would not want to or can work.  Whether it be we reached a certain age, health reasons[1], or job elimination.   We need income sources we can tap into once that time comes.

The Importance of Diversifying Retirement Income Sources

Unfortunately, most Americans are not part of the ultra-wealthy nor do many have unlimited resources for such an event.   According to the Employee Benefits Research Institute (EBRI) there are three income sources individuals typically tap into for retirement.   I’m going to add a fourth one to the list. The sources include:

·        Personal Savings

·        Social Security

·        Employer Sponsored Retirement Plans

·        Continue to work.

According to EBRI, for 2022 around 18% of an individual's income for retirement will come from personal savings[2].  Around 69% will come from Social Security. Around 12% will come from employer sponsored retirement plans. 

With individuals counting on 69% coming from Social Security, there is an obvious need to beef up retirement savings to other sources mentioned   Employer retirement plans are one of the most underutilized retirement and tax savings vehicles small businesses can use to accomplish this but are unaware.

Exploring Employer Sponsored Retirement Plans for Small Businesses:

  Employer sponsored retirement plans not only reduce the taxable income of an employer in profitable years, it also allows the amount used to reduce the taxable income as a retirement plan contribution.  Its one of the only places an employer and employee can double dip in savings.  Savings from taxation through a tax deduction and the deduction is contributed to the individual’s account on a tax deferred basis.  The contributions to these plans can be invested in just about anything you can imagine.  Beyond Stocks, Bonds and Mutual Funds, investments can include: real estate, notes, mortgages, private placements, tax liens and more.  

To get started there are three types of small business retirement plans to choose from.  Those plans can be best read about under an IRS Publication, IRS Publication 560[3].   The three plans include the Simplified Employee Pension Plan, also known as the SEP, The Savings Incentive Match Plans also known as the SIMPLE Plan, and the big brother of both called the Solo 401(k) plan which allows for the largest amount of contributions.   Focusing on the Solo 401(k), this retirement plan is designed for solopreneurs who do not have any employees.  The IRS calls it a one-participant plan[4]

Don’t get the term one-participant confused however.  A business can have more than one participant as long as they are all owners. The owners could include business partners and their spouses since they are considered owners as well.   As long as any owner and spouse get paid from the business they can contribute.  

The plan can be established until the employer’s tax return due date plus extensions.  Once the plan is established contributions can be made.  To make sure the opportunity for investing is not limited, make sure to find a competent platform provider to accommodate the document to establish the plan and a checking account to deposit the contributions into.  The recordkeeping system[5] which is the third item on the list of DOL requirements is the tracking of the different contribution sources also known as “buckets”.  The platform should be able to compartmentalize each bucket since each type of contribution has its own tax benefit and rules surrounding contribution limits, taxation and timing of distributions.  A business owner can surely establish their own recordkeeping system through other means such as spreadsheets or have their tax advisor do the record keeping for them as well.  The economical way however is to find a platform that has most of the components required for recordkeeping as well as additional services such as preparing annual filings called the IRS Form 5500-EZ, compliance support and others. 

Platform providers such as Quest Trust, IRA Resources Trust and SEPira(k) are some platforms that contain the most features and provide the highest level of value for its services.   These platform services will allow businesses to do what they do best, run a business.


References:

[1] https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_572_spendinginret-6oct22.pdf

[2] https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_572_spendinginret-6oct22.pdf

[3] https://www.irs.gov/pub/irs-pdf/p560.pdf

[4] https://www.irs.gov/retirement-plans/one-participant-401k-plans

[5] https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/401k-plans-for-small-businesses.pdf