It’s a common story – business owners put everything into their businesses for years before being in a financial position to put real money away for retirement. Once they’re ready to really get going, we can suggest a number of retirement plan designs and individual plan features that can help them reach their goals. Depending on their situation, here’s a quick snapshot of some of the most popular.
First, a 401(k) plan with a Safe Harbor feature can be a great vehicle. With this plan, an owner can make significant contributions as long as the rank and file are guaranteed a meaningful base contribution. The “safe harbor” is a free pass on the testing that is otherwise required to demonstrate adequate coverage and fairness.
For some owners, an age-weighted plan design can be advantageous because, as its name implies, it takes the age of employees into consideration when calculating annual contributions. This can be especially helpful if the owners are older and their workforce is younger as the calculations favor those closer to retirement.
A traditional defined-benefit (DB) plan can also work to the advantage of owners as it’s meant to guarantee a promised benefit at retirement and is calculated to contribute to fund that liability. DB plans permit much higher annual contributions than 401(k) type plans, but it’s important to note that annual contributions to fund their results are mandatory, not discretionary.
A cash balance plan is something of a hybrid. It’s has the mandatory provisions of a DB plan, but provides an accumulated balance like a defined-contribution plan – rather than a promised benefit at retirement. It, too, allows owners to save much more than is possible under a 401(k) or profit-sharing plan.
And one more popular idea is, naturally, the pairing of a 401(k) and a cash balance plan. This provides the opportunity for rank-and-file employees to participate while giving owners a more generous savings path.
And don’t forget, the IRS provides all employees over the age of 50 the opportunity to make what are called “catch-up” contributions. This might be the best named featured ever as it truly means that you could have caught up for years when you were building your business or raising a family and weren’t able to put away enough for retirement. Catch-up contributions raise the deferral annual limit for older savers.
The key to remember is that all of these are tools in our arsenal. You can count on us to work with you to create custom tailored proposals that compare the features and benefits of various approaches and help clients optimize their path to long term financial success. Give us a call to see how we can maximize your clients’ chances for success.