Retirement Plan Options

It is never too soon to start thinking about your retirement


Retirement Plans for Employees

Saving for retirement options are somewhat limited for the W2 employee. The 401k is an employer sponsored plan which allows the employee to make contributions which are automatically deducted from their paycheck. The contributions are vested as the employee directs. Many employers offer to match the employee contribution but they are not required to do so.  Recently, we have seen matching percentages greatly reduced and even completely removed by employers.

Employees under the age of 50 are eligible to save the maximum pre-tax amount, which for 2015 is $18,000 per year. Employees over the age of 50 can contribute an additional $6,000 per year “catch up,” but it has to be input as a separate entry.

Employees have to specifically sign up for both the “regular” and the “catch-up” plan.  Many of our clients made that mistake before coming to us; they thought they were signed up for both but, they had only signed up for the regular 401k deposit.

An interesting nuance has come to light in recent years with the invention of the Roth 401k. Now, employees have three contribution choices:

  • Pre-tax contributions to a regular 401k,
  • Post-tax contributions to a Roth 401k,
  • Split contributions between the first two choices

If their income allows, the W2 employee is also free to invest in an outside IRA.

Making these decisions involves taking into consideration many “moving parts,” and should be discussed with a financial professional like a Beacon Financial Group Advisor.

Retirement Plans for Business Owners and Sole Proprietors

Business owners with more than one employee must first decide whether they want to maximize their own contributions or contribute to everybody who works for them. Sole Proprietors have more flexibility. Here are a few of their retirement plan options:

  • Simple IRA (different from both Traditional and Roth IRAs)
  • Simplified Employee Pension Plan (SEP)*
  • 401k Plan for larger companies (50 employees, or more)
  • Pensions

*The Simplified Employee Pension is not truly a pension. It is really more of a savings account for the business owner and employees. It allows the employer to put away much more money for himself and/or his employees at much higher percentages-- Company may contribute up to 25% of compensation and 20% for sole proprietors.  There is a $53,000 pre-tax limit for 2015.

The sole proprietor actually has the most advantage because he or she does not have to make contributions for employees. A large business owner that has multiple employees needs to create a more customized plan to satisfy detailed IRS rules in addition to structuring a plan that will serve him or her well.

Employees, sole proprietors and business owners all have options and unique opportunities to create an advantageous retirement plan. It is very similar to a puzzle. There are a lot of complex pieces that need to be looked at carefully and put together in a well thought out manner. It is always a good idea to get the advice of a Beacon Financial Group advisor. The future depends on the choices made today.  

Which retirement plan is best suited for you and/or your employees?