Understanding Retirement Savings Plans

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If you live in California, you’ve probably heard a lot more about retirement savings in the past year than ever before.  That’s because all employers with 5 or more W-2 employees have to offer a retirement savings plan or enroll in the California State-run CalSavers retirement savings program.  For many employees, the idea of pulling money out of their paychecks right now with high inflation and soaring gas, rent, and food prices might seem like a terrible idea. So, why should you save for retirement now? The first thing is to understand your options and that starts with answering the question:  What do all of these acronyms mean? And what do they mean to you? 

A high-level overview of Retirement Savings acronyms

From 401ks to IRAs, Roth and SIMPLE, SEP, and Solo, the number of acronyms used when talking about retirement savings can get overwhelming. As if you don’t have enough to worry about already, you’re expected to be an expert in finance overnight. So, to simplify things, let’s review what the terms mean and why each of these options exists to begin with. 

The most popular retirement savings plans are called 401ks because that’s the IRS code for income that they can’t tax. 

A 401k is a retirement savings plan that is sponsored by an employer. It helps employees save and invest for their retirement. The money in a 401k investment account grows tax-deferred, meaning you don’t pay taxes on it until you withdraw it when you are retired. 

There are two types of 401k plans: Roth and traditional. Roth 401ks are funded with after-tax dollars, so you don’t get a tax break when you contribute but you also don’t pay when you take money out later. Traditional 401ks are funded with pre-tax dollars, so you get a tax break when you contribute, but you’re kicking the can down the road because you will pay taxes later when you take it out.

But wait, there’s more… there are Solo 401ks and Employer-Sponsored 401ks, Profit-sharing 401ks, Safe Harbor 401ks, and SIMPLE 401ks. 

Solo 401ks are available for people who are self-employed or own a small business. They work like employer-sponsored 401ks, but with some key differences. As a solopreneur, you are both employer and employee. So, you can contribute to your retirement in both capacities. For 2022, you can contribute up to $61,000 in a year, however, you configure it. (this limit changes but that’s the number for 2022).

Employer-sponsored 401ks are offered by companies as a benefit to employees. Sometimes, employers match a portion of employee contributions, making them an even more attractive way to save for retirement. For example, if you contribute $300/month to your employer-sponsored matching 401k every month, that money is working for you in multiple ways. First, you don’t pay income taxes on it. Second, it’s going into an investment account that is earning interest, so it’s growing for you. And Third, your employer, in this matching scenario, is contributing let’s say $150 to your 401k for you.  You’re able to save more without taking as much out of your paycheck every month.  

A profit-sharing 401k is a type of 401k that allows employees to share in the profits of their company. Like an employer-sponsored matching 401k, contributions are made by both the employer and employee, and the money is invested in the same way as a regular 401k. The main difference is that employees can receive distributions in cash or stock, depending on how the plan is set up. This can be a great way for employees to feel more invested to their company and have a stake in its success.

A safe harbor 401k  provides all eligible plan participants with an employer contribution, everybody gets the same with safe-harbor plans. The advantage to a business owner for being generous and equitable is that safe harbor plans allow businesses to avoid annual IRS nondiscrimination testing. The contributions in a safe-harbor plan are mandatory and hard to adjust later, and vesting (your 401k is 100% yours) is immediate in a safe harbor plan. In many safe harbor plans, employers can choose to “force out” small-balance (<$5,000) participants after they’ve left their jobs. For employers, the costs of maintaining all those small balance plans can be cumbersome with missing participants, uncashed distribution checks, and increased plan costs.

A SIMPLE 401k is a retirement savings plan that is similar to a Simple IRA (keep reading), but it has higher contribution limits. With a Simple 401k, you can contribute up to $56,000 per year (as of 2022), compared to $13,000 for a Simple IRA. Like a Simple IRA, the money in a Simple 401k grows tax-deferred. You don’t pay taxes on it until you withdraw it in retirement.

The main advantage of any 401k is that it offers tax-deferred growth. This means you don’t pay taxes on the money in your account until you withdraw it in retirement. This can be an advantage since your money will have more time to earn interest.  When you do withdraw that money, you will likely be in a lower tax bracket than you are in while you are working and contributing to the plan, so you’ll also pay less in taxes at that time than you would if you just earned and paid taxes on that money now. 

Speaking of IRAs, let’s review the options available

IRAs come in a lot of “flavors” Traditional IRA, Roth IRA, Simple IRA, SEP IRA

IRA stands for Individual Retirement Account. 

Traditional IRAs are tax-deferred retirement accounts in which investors can contribute pre-tax dollars. Investments grow tax-free until withdrawal during retirement, and withdrawals are taxed at the IRA owner’s current income tax rate. There is a contribution limit ($6,000 for 2021 and 2022 for those under age 50, $7,000 for those 50 and older), and required minimum distributions (RMDs) must begin at age 72. qualified withdrawals from a traditional IRA prior to the age of 59.5 years old may result in taxes plus a 10% penalty.

A Roth IRA  is set up to use after-tax dollars, which means you pay taxes and then contribute to your Roth IRA. You don’t get a tax benefit when you put the money away, but, the money grows tax-free, and you can withdraw money tax and penalty-free after age 59½ (as long as the account has been open for five years at that time). There are no contribution age restrictions as long as you have qualifying earned income. Also, there are no Required Minimum Distributions (RMDs) so if you have enough money, you can leave your Roth investment in the account into retirement. One last bonus. If you die and pass your Roth IRA to your heirs, their withdrawals will also be tax-free. You’d choose a Roth IRA if you were in a lower tax bracket (making under the limit for a Roth IRA)  but you think you’ll be in a higher tax bracket later when you withdraw the money. 

A  SIMPLE IRA plan (Savings Incentive Match Plan for Employees) Is like an employer-sponsored 401k but well, simpler. SIMPLE IRAs require employers to match employee contributions: 

  • Up to 3% of your employee’s compensation
  • At least 1% for no more than two out of five years

A SIMPLE IRA is easy to set up for an employer and allows the employee to put money away before taxes.  So it cannot be combined with a Roth IRA.  The contribution limits are lower than other retirement plan options.  It is very much like the traditional IRA but with mandatory matching contributions from the employer. 

A SEP IRA stands for a simplified employee pension individual retirement account. So you can see why the acronym was a good idea. SEP IRAs use pre-tax money and are for business owners with few to no employees or self-employed people. With a SEP IRA, if you have employees you have to contribute as much to their IRA as you do to your own. We’re all for generosity but with a large team, or even a team of 5, that could get very expensive. 

Saving for retirement is so important, your money grows in an investment account and is waiting for you when your income-earning days (mostly) are done.  While it can be hard to motivate to put money away during inflationary economic times, consider the benefit long term for you and for your loved ones.  If you have questions, please visit our resource center to learn more about financial wellness and some of the steps you can take to reduce financial stress and strain.

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 educational material.

Simple Guide to CalSavers for Business Owners

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The State of California requires that all businesses with 5 or more employees offer a retirement savings program. When examining the retirement-readiness of CA residents it became clear  that many people were not saving enough for retirement. Because of this, a whole generation of retirees was facing the very real possibility of finding themselves dependent on State-funded programs… which would be very expensive for the government.  So, to solve the problem, California now requires all employers with 5 or more employees to offer retirement savings to their employees.  Employers and business owners can choose to default to the California state-run CalSavers program or, they can offer a retirement savings plan of their own. 

There are a number of reasons why business owners should consider setting up their own 401k plan rather than relying on CalSavers. In this article, we review what CalSavers offers, what a custom plan can offer, and what the benefits of a custom 401k retirement savings plan are to both employers and employees. 

What is CalSavers and what does it offer?

The CA EDD describes CalSavers as: 

“a retirement savings program for private sector workers whose employers do not offer a retirement plan. This program gives employers an easy way to help their employees save for retirement, with no employer fees, no fiduciary liability, and minimal employer responsibilities.” The details are that CalSavers offers a basic Roth IRA to help employees build their retirement savings. If you are not familiar with Roth IRAs, they allow employees to save after tax dollars. 

Roth IRAs have lower contribution limits, limited investments, and limited tax advantages. 

You can withdraw the money from a Roth IRA without having to pay any taxes on it because you paid taxes on that income before contributing it to the IRA. 

The contribution limit for a Roth IRA is $$6,000 per year, and the income limit is $144,000 for single people or $214,000 for married filing jointly per year (as of 2022). This means that if you make more than $144,000 per year, you are not eligible to contribute to a Roth IRA. 

There are also limits on what you can invest in with a Roth IRA. You are limited to investing in stocks, bonds, and mutual funds. 

While a Roth IRA can be a great way to save for your retirement, if you are looking for a retirement savings plan with more flexible investment options and higher contribution limits, you will want to consider setting up a 401k for your business instead. 

First and foremost, a custom 401k plan can be designed to specifically meet the needs of your business and your employees. This means that it can be tailored to maximize both employee retention and to encourage and reward retirement savings.

Additionally, setting up a custom 401k retirement savings plan can have tax benefits for Business Owners. CalSavers does not offer any tax breaks for businesses, meaning that you could be missing out on significant savings. 

If you are not familiar with the difference between a Roth IRA and an employer-sponsored 401k: 

A 401k plan is a retirement savings plan that allows employees to save money for their retirement with pre-tax dollars, which means that the income they choose to invest in the plan is not taxed until it is withdrawn from the plan after retirement. 

Setting up a 401k retirement savings plan for your business has a number of tax advantages that can save you money in the long run. 

One of the biggest benefits is that contributions to the plan are made with pre-tax dollars. This means that you do not have to pay taxes on the money until it is withdrawn from the account. This allows employees to save more money for their retirement. 

Another advantage of 401ks is that they offer businesses a number of tax breaks. For example, businesses can deduct their contributions to the plan from their taxable income, and they can also deduct employee contributions. This can save business owners a significant amount of money on their taxes each year. 

It’s no secret that good employees are hard to find and harder to keep. 

One of the best ways to retain key employees is by offering them a good benefits package. And one of the most valuable benefits you can offer your employees is a 401k retirement savings plan. Offering a 401k plan is a great way to show your employees that you value them and want them to stay with the company for years to come. 

If CalSavers is not the right solution for my business, what do I have to do to exempt my business from the requirement?

Business owners must have a retirement plan in place as of the mandatory participation date. This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan. Want to know what these terms mean? Check out our blog on simplifying the retirement savings jargon here. 

Even if you set up your own 401k employers must still register with CalSavers to certify their exemption. Visit: https://employer.calsavers.com and choose  “I need to exempt my business” from the drop-down menu. You will need your federal EIN or TIN and an access code provided on the notice sent to you from CalSavers (can’t find it or didn’t get one? Call (855) 650-6916).   

Setting up a 401k retirement savings plan for your business is a great way to save money on taxes and provide your employees with a valuable benefit. If you are considering CalSavers for your retirement savings plan, be sure to weigh the pros and cons carefully before making a decision.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Retirement Benefits That Benefit Employers, Too

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When it comes to job searches and accepting offers, good employee candidates have options. It’s why employers must offer employee benefits that stand out in today’s market—and why a 4% 401(k) match may not cut it anymore.

When you consider that most applicants will review your retirement package and medical insurance coverage when considering a job, updating your benefits can make a significant and decisive difference. Do you want to update your employee benefits to be more competitive? We’ll share how one effective change to your retirement plan can help recruit and retain great employees while being advantageous to you, too.

Provide Retirement and Financial Guidance Beyond Open Enrollment

Open enrollment is generally the only time employers interact with their employees regarding their retirement benefits. To provide more value and incentive to your employees, offering guidance beyond open enrollment is essential. While giving financial advice requires partnering with a licensed professional, there are various benefits to you and your business. Retirement professionals can review your existing retirement program and provide a more comprehensive approach that meets the needs of you and your employees long term, such as:

  • Financial coaching beyond your 401(k) plan. Your employees need resources and access to information and advice to help them succeed before and after retirement. A financial professional can help provide those resources and education on other financial topics such as saving to buy a home or reducing credit card debt.

  • Medical plan savings when your employees retire on time. Employees who are educated about their retirement options and able to consult with a professional will likely make more informed decisions regarding their financial future. Investing early, saving enough, and making the maximum contributions are actions that will help your employees retire on time. When more of your employees retire between the ages of 62 and 65 or younger, the average age of your employees also decreases, which could help you save in medical plan expenses annually.

  • More productive and satisfied employees. Another key benefit of access to a financial advisor in your retirement program is that your employees will often feel more financial stability in other areas of their lives, which may result in more productivity and higher morale at work. Employees who feel supported and have financial confidence are usually less stressed and more loyal, which can mean less turnover and hiring costs for you.

What to Consider in a Retirement Professional

Before hiring a financial professional, ensure your employees and business are getting the most value, and you can avoid some common retirement plan mistakes. Begin by asking if they can meet the following responsibilities:

  • Will they be able to provide one-on-one financial guidance and electronic and in-person resources that meet your employees’ financial needs at work and home? At RWM, our clients can consult with live professionals to ask questions and are never routed through a call center.

  • Are they well-versed in the legal and compliance requirements according to your organization type? We’re skilled in several different organization types, including corporations, agricultural companies, and tribal groups, to help our clients maintain compliance and manage their risk.

  • Are they offering access to diversified investment options and other features that can help reduce your costs? We help our clients review their investment spread and make adjustments with cost-efficient options.

Learn more about how we help businesses implement updated employee benefits to create a more attractive and cost-effective retirement program.