Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2007 Ameriprise Financial, Inc. All rights reserved. The New Appeal of Small Business Retirement Plans Justin J. Spraker Financial Advisor 9/12/2009 Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2006 - 2009 Ameriprise Financial, Inc. All rights reserved.
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Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2007 Ameriprise Financial, Inc. All rights reserved.
The New Appeal of Small Business Retirement PlansJustin J. Spraker Financial Advisor9/12/2009
Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2006 - 2009 Ameriprise Financial, Inc. All rights reserved.
Lack of plan sponsorship
> Small businesses are important to the U.S. economy1:> Represent 99.7% of all employers
> Employ 50% of the private workforce
> Create 65% or more of net new jobs added to the economy each year
> And yet — only 44% of small businesses (those with fewer than 100 employees) offer a retirement plan2
1 “Ten Reasons to Love Small Business,” February 9, 2006, press release, Office of Advocacy, U.S. Small Business Administration2 “National Compensation Survey: Employee Benefits in Private Industry in the United States,” U.S. Department of Labor, U.S. Bureau of Labor Statistics, March 2007.
Benefits of plan sponsorship
> For the business> Potentially reduce taxes
> Recruit and retain employees
> Save for owner’s retirement
> For employees> Tax-efficient way to save for retirement
> Tax-deferred growth
> Improved employee morale
Today’s topics
IRA-based plans
401(k)
Selecting a plan
► IRA-based plans
What is an IRA-based plan?
> SEP and SIMPLE — two types of IRA-based plans designed for small business owners
> Contributions, employer and/or employee, are held in IRAs
> IRAs are in the name of the participant
> Participant controls his or her own IRA
Advantages of IRA-based plans
Generally,longer
eligibilityrequirements
(SEPs)
No fiduciaryliability for
investments
Loweradministrative
costs
NoERISA bonding
requirements
No specialgovernment
reporting
Portability &accessibility
SEP IRA features
> Flexible employer contributions
> Contribution limit: Lesser of $49,000 (for 2009) or 25% of eligible compensation
> Able to integrate with Social Security
> Deductible contributions: Employer can deduct up to 25% of eligible compensation for contributions made to the plan
> Deadline to establish coincides with the business’s tax-filing deadline including extensions
> No government reporting
> No plan loans
> 100% vesting
Employee SEP IRA eligibility
Maximum requirements allowed
> Age 21 or older
> Employed three of the immediately preceding five years (year of service may be part time)
> Earned at least $550 of compensation in the year of contribution
> Employees covered under a collective bargaining agreement can be excluded
Structure of SEP IRA plan
Employer’s SEP Plan
Employee’s SEP IRA
Employee’s SEP IRA
Employer’s SEP IRA
$$ $$ $$
Employer’s SEP Plan
SIMPLE IRA features
> Both employee and employer contributions
> Flexibility to choose between matching contributions or non-elective contributions
> Low administration costs> No non-discrimination testing
> No top-heavy testing
> IRA-based advantages: limited fiduciary liability
> Deadline to establish a SIMPLE IRA is October 1
> SIMPLE IRAs cannot be used in conjunction with any other employer-sponsored plan during the same year
SIMPLE IRA employee contributions
> Defer up to $11,500 for 2009
> Flexibility to determine how much to contribute each year
> Catch-up contributions of $2,500 for 2009 (not aggregated with IRA catch-up contributions) for participants age 50 and older
SIMPLE IRA employee contributions
> Saver’s credit for contributions (if eligible)
> Traditional IRA contributions are not eligible to be made to a SIMPLE IRA
> Early withdrawal penalty is increased from
10% to 25% on distributions taken within two years of beginning participation
SIMPLE IRA employer contributions
Employers can choose between two methods for making employer contributions to the plan:
> Method 1 Match 100% of the first 3% of compensation (can be lowered to 1% in two out of five years)
> Method 2 2% non-elective contribution to all eligible employees
Structure of SIMPLE IRA plan
Employee’s SIMPLE IRA
Employee’s SIMPLE IRA
Employer’sSIMPLE IRA
Employer’s SIMPLE Plan
Employees’ salary deferrals
Employer’s match or non-elective contribution
$ $ $ $ $ $
SIMPLE/SEP comparison
> Annual income: Andrew = $50,000
> 3 Employees @ $20,000 each ($60,000 total)
> Andrew’s contribution to himself: $8,500: 17% of compensation
> Andrew’s contribution to employees: $1,800: 3% of compensation
This hypothetical example is provided for illustrative purposes only.
SIMPLE IRAEmployeeDeferral Match
TotalContribution % of Income
Andrew $7,000(14%)
$1,500(3% of $50,000)
$8,500 17%
Employees $2,400(4%)
$1,800(3% of $60,000)
$4,200 7%
SIMPLE/SEP comparison
> Annual income: Andrew = $50,000
> 3 Employees @ $20,000 each ($60,000 total)
> Andrew’s allocation: $8,500 (17% of income)
> Andrew’s contribution to employees: $10,200 (17% of compensation)
SEP IRA Income Contribution Rate Contribution Amount
Andrew $50,000 17% $8,500
Employees $60,000 17% $10,200
This hypothetical example is provided for illustrative purposes only.
SIMPLE/SEP comparison
> Andrew’s contribution to employees:> SEP: $10,200
> SIMPLE: $1,800
> Difference: $8,400
> Which plan would you choose?
This hypothetical example is provided for illustrative purposes only.
IRA custodian
> Know your client’s custodial agreement
> Each custodian sets their own custodian rules and procedures within IRS guidelines
> Be sure you understand the custodial agreement defaults and limitations
> Be sure your clients:> Always name a designated beneficiary for all
IRA assets
> Regularly review beneficiaries to verify they still meet their goals
► 401(k)
Advantages
> Non-IRA based
> Assets held by the plan’s trust
> Participants typically have the ability to direct the investment of their plan assets, choosing from the plan’s investment options
> IRS reporting required
401(k) advantages
> Two funding components:> Salary-deferral contribution: from $0 up to $16,500 for 2009
> Discretionary profit-sharing contribution: from 0% up to 25% of eligible compensation
> Aggregate limit: 100% of compensation up to $49,000 (for 2009)
> Additional salary deferral catch-up contribution of $5,500 for those age 50 or older (for 2009)
> Loans
> Vesting
> Designated Roth 401(k) deferrals
Disadvantages
> Administrative costs> Non discrimination testing
> Record keeping
> Governmental reporting
> Increased fiduciary liability for investment selection
> Shorter eligibility requirements compared to SEP> 1-year: if a vesting schedule is used
> 2-years: if 100% vested
Individual 401(k)
> 401(k) used by business owner — with no employees
> Opportunity to maximize contributions: Deferrals + Employer contributions
> No non discrimination testing
> No governmental reporting until the plan exceeds $250,000
> Roth 401(k) deferrals available
Individual 401(k) example
> Individual 401(k)> Employee deferrals: $16,500
> 25% employer contribution: $25,000
> Total contribution: $41,500 (41.5%)
> SEP: $25,000 (25% of eligible compensation)
> SIMPLE > Employee deferrals: $11,500
> 3% employer matching contribution: $3,000
> Total contributions: $14,500 (14.5%)
This hypothetical example is provided for illustrative purposes only.
Assume
Business owner (under age 50), set up as a
corporation, with $100,000 form W-2
compensation
► Selecting a plan
Which plan fits your client’s needs?
> Compare:> Contribution and deduction limits
> Establishment deadlines
> Eligibility features
> Key features and benefits
Next steps
Review your current book of small business owners and determine:
> Need or desire for a retirement plan
> For those with existing plans, particularly money-purchase pension plans, determine how recent tax law changes may have impacted them
> Is your client’s current plan meeting their needs?
> Set up a meeting to review
Small business resources
Ameriprise Financial offers:
> Plan selection assistance
> Comprehensive resources> Plan comparison guides
> Retirement plan implementation materials
> Participant savings guides
> Enrollment presentations
> Local financial advisor to provide personalized support
next steps
Let’s get started.
Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 1998-2009 Ameriprise Financial, Inc. All rights reserved.
Justin J. Spraker, Financial Advisor
Ameriprise Financial Advisors5 Southside DriveSte 202Clifton Park, NY 12065(518) [email protected]
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