By: Greg Trost, President & Founder of Trost Financial
As we prepare for the end of another business year, it is important to look at retirement plan options that would have to be in place before December 31st each year. The time sensitive retirement plans are as follows:
- Defined Benefit Plans: These plans provide predetermined payments to employees upon retirement or termination of employment. The payments are decided by many factors including the number of years employed, earning history and age. A few requirements to take into consideration with defined benefits plans are:
- All plans must be set up with a third-party administrator (TPA) and can therefore be costly
- Depending on the age of participants, employer contributions can be quite large
- Typically, this is most efficient for owners in their late 40’s to early 50’s
- There is a lifetime cap for deductibility
- Employees may be carved out and do not have to be included in the plan (determined by the TPA and the owner)
- Traditional 401(k): A retirement plan that allows you to invest part of your income, using pretax contributions. This can help to increase your investments, tax-deferred, during your career. At retirement, the withdrawals will be taxed at the ordinary income tax rate.
- Roth 401(k): Like a Traditional 401(k) except that contributions are made with after-tax dollars and are not deductible. Also, there is no required minimum distribution (RMD). The investments grow tax free, and the withdrawals will not be taxed when they are received by the investor.
The other retirement plans that can be dealt with after the first of year are the following:
- Individual Retirement Account (IRA): A tax-advantaged retirement savings where money can grow tax deferred. When you start taking distributions, you can expect to pay ordinary income tax on the withdrawals. Depending on your income level, contributions made to your IRA can be partially or fully deductible.
- Roth IRA: The Roth IRA, like a traditional IRA, builds savings by allowing its owner to make regular contributions and invest them in a portfolio of stocks, bonds, mutual funds or other investments. The primary benefit of a Roth IRA, however, is that your contributions and earnings grow tax-free and can be withdrawn tax-free as contributions are made with after-tax dollars.
- Simplified Employee Pension Plan (SEP) IRA: A SEP IRA may allow business owners to provide retirement benefits for themselves while doing the same for their employees. The investment percentage must be the same for employees as for the owner, after a three-year waiting period from the start date of the plan. All contributions are tax deductible, even those made to owner accounts.
It is important to meet with a financial planner or CPA to discuss the type of plans that are right for your tax situation. Those decisions include whether to fund a Roth 401k/IRA or a pre-tax tax 401k/IRA. We at Trost Financial can help you understand the benefits of each and that would be a very worthwhile conversation as part of your entire retirement planning discussion. Click here to schedule a meeting.