Tag Archives: small business retirement plans

Financial Impact Factor Radio: So What is a TPA?

  By petillo | January 28, 2011 - 12:35 pm | 401k, college, debt, financial impact factor radio, financial planning, IRA, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, women and finances
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Alison Farrin of Innovative Pensions was kind enough to be our guest today on the Financial Impact Factor Radio. She explained to my co-hosts Dave Kittredge and Dave Ng of FinancialFootprint.com exactly what her role is in the 401(k) plan as a TPA or third party administrator. She offered some very helpful insights in how you should use the plans as well as the way small businesses should approach the process of providing retirement benefits to their employees.

Also on the show, a look inside the increasing financial debt faced by college students. Dave and Dave explain forbearance, deference and defaults.

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MomsMakingaMillion: Small Business Retirement Plans and the SEP-IRA

  By petillo | February 4, 2010 - 3:48 pm | 401k, IRA, Retirement Planning Target 2025
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In part two of a three part discussion on small business retirement plans, we look at the SEP-IRA on MomsMakingaMillion radio.

Kat: Last week you told all of us about the solo 401(k).  You drove home the importance of a salary as a business expense and because you do this, it made you eligible for a solo 401(k).  But suppose your business is growing?

Paul: To consider retirement at the onset of your company’s creation is paramount to that goal. We may say we are working for the glory and the independence, the profits and the satisfaction but in truth, we are working for the payoff.

While the solo 401(k) is designed for the business of one, often times that business will grow to include other people. Product lines expand as your success grows. Contracting out work can be a temporary stopgap yet if you would like to see your business grow to entice more customers and control the quality of your projects, you may need to hire people to work with you in those goals, folks who share your ideals and passions, the same people who, because of their dedication will also be deserving of a piece of the profits generated.

Kat: It’s about the profits.  What can the small business person do?

Paul: A SEP-IRA can fill those needs nicely. But like all taxable events, the rules need to be followed. SEP-IRA or self-employed pension individual retirement account allows you, the employer of one or more, to share in the profits of your business by making contributions to this type of plan.

It acts just like a traditional IRA would with added feature of shifting contributions. In good years, the plan can allow contributions of up to $49,000 per employee. This contribution is tax deductible for the business and the growth of those funds is tax deferred. In years when the business profits falter or are simply subject to cyclical changes, the contribution can be lowered or eliminated completely.

Kat: Who can use a SEP-IRA?

Paul: SEP IRA is a retirement plan designed to benefit self employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify. In those circumstances, the company pays the business owner (you) a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner’s W-2 salary up to the SEP IRA contribution limit. The caveat: you must also contribute to your employees the same percentage as was contributed to yours.

Kat: So if you pay you, you have to do the same for your employees?
Paul: Yes.  But the 25% is for incorporated businesses. The contribution limits are slightly lower for an unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship. In this instance, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income. Either way, these are hefty savings allowances compared to the limits placed on other types of retirement plans.

One important thing to consider though: having a solo 401(k) as well.

Kat: Really?  You can have both?

Paul: Because a SEP-IRA is dependent on profits and if you have employees, sharing those profits with them, a solo 401(k), allowable as well alongside the SEP-IRA, gives you another opportunity to put away money for retirement from your income, which may not be reliant on the profits of the business.

Kat: Who is eligible?

Paul: Eligible employees must be at least 21 years of age and have worked for you for at least three years of the last five years. SEP-IRAs are easy to set up and cost effective, may have little or no paperwork to file with government and could net you a tax deduction of up to $500 for the first three years of the plan. Plans are administered by the employer through a mutual fund company. generally offering a simple basket of funds from which to choose.

How about next week we talk about something SIMPLE?

The Solo 401(k)

  By petillo | January 27, 2010 - 1:59 pm | 401k, IRA, Retirement Planning Target 2025
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On Friday, I will be discussing the solo 401(k) with MomsMakingaMillion hosts Gina and Kat.  Gina has been curious about how someone who has not had access to a 401(k) at their place of employment can invest for retirement.  This is the first of a three part series on the topic.

Kat: If the entrepreneurial spirit is truly alive and if the Moms listening to this show are an example, then chances are you have given some thought to opening your own business.

Now we all know that more than the business plan is needed. More than just that great idea; the one that you know is just what some consumer somewhere cannot live without. More than just that spirit of being your own boss. More than the freedom to call the shots, be the builder of your own destiny.

Being in business for yourself is a huge risk that is likely to impact your retirement.  Paul, you have some thoughts on this?

Paul: I do.  Those of use running our businesses know that relying on your skills day in and day out will sap the very lifeblood out of you, leaving you thrillingly exhausted at the end of each day. It is great and terrifying, all at the same time.

And many of us will fund that venture with money that may not come directly from your previous employer’s 401(k) – at least I hope is hasn’t – but from money you could have put away for that future.

Kat: Is using your 401(k) to begin a business a good idea?

Paul: Not really. But people do it anyway. Some folks borrow, use saved money, look to friends and family for help.  But if you did tap those retirement funds, there are ways to recoup those lost dollars quickly.

But you have got to act fast. Right from the beginning.

Kat: What is one the first things you should do?

Paul: First, pay yourself a salary.  A surprising amount of start-ups do not see this a necessary expense.  It is understandable.  They think that if they take money from the business rather than plowing dollars back into it, they are hurting the business.  You put profits back in; a salary is an expense.

And just like when you had that other “regular” job, the one with the 401(k), you should account for a pre-tax retirement contribution.

Kat: Sounds good.  What now?

Paul: There are several ways to get going. First, we will discuss the easiest one to set up. And in future segments, we will talk about other plans to think about as your business grows.

The solo 401(k) is for a sole proprietor, a business of one. It was created for people with great ideas, folks like you Your business can have a spouse for an employee but generally, the self-employed, the entrepreneur, the small business owner must go it alone. The good thing about solo 401(k): simplicity.

Kat: Now there’s an idea worth noting.  Simplicity.

Paul: It has to be simple to use and easy to maintain.  After all, you have enough to deal with.  You may contribute up to $13,000 of you tax-deferred income with a bonus incentive (thrown in for good measure)  allowing you to add up to 25% of profit from your business as well. You might be living on tuna and crackers, but this type of plan can allow the start-up business owner the advantage of playing 401(k) catch-up in a relatively short time. The contribution limit is $41,000.

The relaxed rules that come with a solo 401(k) offer you the ability to decrease your contribution or suspend it altogether. By try not to. Because other rules in the plan might come in handy during some rough spots in your business’s future. Known as hardship withdrawals, these loans against your solo 401(k) often have more favorable terms than those plans administered by larger enterprises. You might, at some point in time consider rolling over your previous 401(k) into your new plan. We discusses rollovers last week.

Kat: There are a few drawbacks to the to the solo 401(k).

Paul: First, you need to find a plan administrator. Typically, these might be mutual fund managers but not always. The fund families are generally less expensive (trust and equity companies can charge anywhere from $400 upward to set up the account, and an additional percentage or fixed fee on the balance of the account) costing about ten dollars to set-up the account and 0.25% against the account balance, it may on the surface seem like a no-brainer to chose these folks. But the funds they offer you may add additional costs to the account in the way of fees and some fund families, like Fidelity who wants $10,000 upfront to begin investing with any fund.

I have a list of plan administrators which I will post on the blog after the show.

You should also consider your business’s growth potential. If its quick, and you anticipate hiring employees, setting this kind of plan up may be a waste of time. Once your solo 401(k) is set up and your business grows, you will need to transition to a traditional 401(k) sooner than you would have liked to – or had the time to.

If you do anything, keep this in mind: this is a taxable event and should have the stamp of approval on it from someone who is a professional. Find a good one through references or very good friends.

Tomorrow: What if you get a job after opening a solo 401(k)?