Retirement Tax Planning
A traditional 401(k) is a workplace benefit that allows employees to make pre-tax contributions through payroll deductions. You, as the employer, have the option to provide additional benefits to your employees. These could include optional profit sharing and/or matching a certain percentage of your employee’s contributions.
The employer contributions may be subject to a vesting schedule. If the employee leaves before the contributions are fully vested, the employee will forfeit the non-vested portion of the contributions. All employee contributions are always fully vested.
You can select from a variety of investment choices to offer in the 401(k) plan. The traditional 401(k) can be a valuable benefit for your employees allowing you to attract and maintain quality staff.
The traditional 401(k) also allows owner-employees a way to defer taxes on their own 401(k) contributions. Investments in the 401(k) plan will also grow tax-deferred, until funds are withdrawn from the 401(k).
Simplified Employee Pension (SEP)
Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees.
A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay. Annual contribution maximums are significantly higher than many other employer-funded retirement plans.
SEPs have the added benefit of allowing funding for the plan up until the tax return is filed, including extensions. This means that you may contribute to the plan up to 9 or 10 months after your tax year is over.
Employers must contribute equally for all employees, so this makes SEPs an excellent choice for businesses with only owner-employees or businesses whose only employees are close family members. Employees cannot contribute to a SEP–only the employer contributes to the plan for each eligible employee.
Savings Incentive Match Plans for Employees of Small Employers (SIMPLE)
SIMPLE (short for “Savings Incentive Match Plans for Employees of small employers”) 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 are an option for a business that has fewer than 100 employees who earned $5,000 or more during the preceding calendar year, as long as the business does not offer any other retirement plans.
Employers who meet the criteria can create a SIMPLE IRA using one of two IRS forms, depending on how the plan will be structured. Use IRS Form 5304-SIMPLE to set up a plan where each employee chooses the financial institution that will receive the contributions. Use IRS Form 5305-SIMPLE to set up a plan where all contributions will initially be deposited in a financial institution that is designated by the employer.
Employers who offer a SIMPLE IRA are required to make either: –
- A matching contribution to the accounts of employees who elect to participate, or –
- A non-elective contribution on behalf of each eligible employee, regardless of participation.
Matching contributions are made on a dollar-for-dollar basis for no less than 1% and no more than 3% of the employee’s contributions. Non-elective contributions are calculated at 2% of each employee’s compensation up to certain limits and deposited into every employee’s account regardless of whether or not the employee contributes any of his or her salary. Employee salary reduction contributions are capped annually at an inflation-adjusted limit: $13,500 for 2020 and 2021. All contributions, both employee salary reductions and employer contributions, are 100% vested in the employee from the outset.
Defined Benefit Plan
A defined benefit pension plan is a type of qualified plan in which an employer/sponsor promises a specified pension payment on retirement. The amount is predetermined using a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment return. Employers typically make most of the contributions to defined benefit plans, although some plans allow for employee contributions and others may even require them.
Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. These calculations require actuarial assumptions and computations that add significant complexity and cost to the administration of defined benefit plans. On the positive side, employees usually appreciate the fixed benefits provided by these plans and employers are permitted to contribute more to these plans than defined contribution plans. The contributions also result in higher tax deductions for the business.
In order to be eligible for the tax benefits available to qualified plans, a defined benefit plan must meet certain requirements, including: Protection from diversion: Plan assets cannot be diverted to purposes other than the exclusive benefit of employees and their beneficiaries; Compliance with nondiscrimination rules: The plan can’t discriminate in favor of highly compensated employees; Compliance with minimum coverage requirement; Compliance with contribution and benefits limits; Compliance with minimum vesting standards; and Compliance with plan participation rules.
Retirement Tax Planning
Contact LNK Tax Group at 661-491-7222 or 213-588-1120 or you can book a free consultation online to learn more about retirement tax planning. We provide tax consulting and tax planning on maximizing tax deductions to businesses in Downtown Los Angeles and Santa Clarita including, Valencia, Stevenson Ranch, Newhall, Castaic, Canyon Country, Agua Dulce, Saugus, Rancho Santa Clarita, Sylmar, Mint Canyon, Val Verde, Mission Hills, Castaic Junction, Granada Hills, Porter Ranch, San Fernando Valley, and Los Angeles County.