How your savings can be savings for your employees as well
2016 was a good year for the bowling industry. In our center, league demand has mostly stabilized, Open Play continues to grow with new initiatives, and the food and bar business march on incrementally. With no price increases introduced in the last twelve months, revenues grew almost exclusively through attendance. That’s something to celebrate: more guests, more revenues, more earnings. If your center is in a similar position, there are essentially three options for your excess profits: reinvest them in the business, spend them on something nice and “shiny” for yourself, or go on a savings spree.
As bowling proprietors, we are slaves to multiple calendars, e.g., a marketing and events calendar, an equipment maintenance calendar, numerous league calendars, to name a few. But the one that should be top-of-mind right now is the tax calendar, which according to a Vanguard Group study runs more than a year. They found “on average, 41% of the dollars contributed to IRAs for any given tax year are invested between January and April of the following year.” With that April date around the corner, our thoughts turn to taxes, tax vehicles, and how to minimize the taxes you pay. Here are several options that may contribute to that savings spree.
IRA Plans
There are many different IRAs to consider when saving for retirement, so spend some time understanding the nuances.
- Traditional or Roth
The best-known tax-advantaged savings vehicle is the Traditional IRA. You contribute pre-tax dollars to your retirement account, reducing current income and taxes. Those savings grow tax-deferred until they are withdrawn at retirement, at which point taxes are paid at your ordinary income rate.
The Roth IRA is similar, except that contributions are made after tax, so while there are no immediate tax savings, investments grow tax-free and withdrawals are tax-free.
- SEP
An idea I like even more for small business owners and self-employed individual proprietors, is a SEP IRA. SEP is short for Simplified Employee Pension. On top of the $5,500 we can save each year in a Traditional or Roth IRA, you can build your retirement nest egg up even further, contributing as much as 25% of your income ($53,000 max for 2016) AND simultaneously reducing your taxable income.
Typically, SEP IRA’s are less complicated and less expensive to maintain than other small business retirement plans, such as 401(k)s. The process for setting it up is straightforward and easy. Funding can be done the same day. And they are flexible – annual contribution rates can vary based on the profitability of your business that year. A SEP can also be financed as late as the due date of the tax return. Like any Traditional or Roth IRA, investment income in the SEP IRA is tax-deferred. And the plan can be offered to eligible employees.
- SIMPLE
SIMPLE is short for Savings Incentive Match Plan for Employees. At first glance, SEP and SIMPLE IRA’s look similar. Both plans are specifically designed for small businesses. They are easy to set up, easy to manage and, unlike 401(k) plans, there are no annual IRS reporting requirements. But there are some important differences between the two.
The major differences are that with a SIMPLE IRA, 1. employees may choose to make contributions toward the plan directly from their salaries and 2. the owner can make contributions, matching or non-matching. Because of this feature, these plans are largely funded by your employees, with limited employer contributions required. That’s better for you, the owner, but there are some offsets, like required employer contributions, and more onerous early withdrawal rules that may require the funds to be seasoned for two years to avoid an early withdrawal penalty.
Let’s Not Forget 401(k) Plans
Most business owners associate retirement savings accounts with 401(k) plans. As discussed above, it does not have to be that way. Choosing the right retirement savings vehicle is a function of many factors, including the size of your organization, your business goals, and the motivation of your employees.
Generally, larger companies set up 401(k) plans. A bigger participant base makes the setup and administrative costs that these plans entail less burdensome, although recently, we’ve seen new business startups streamline some of these costs and headaches, making the 401(k) a more viable alternative for small businesses. Still, there is a higher standard for administration, including requiring written policies and procedures and regular board meetings. Fiduciary responsibilities are not to be taken lightly either, and this plan places more of that burden on management.
So why choose a 401(k) plan? From the employee’s standpoint, there are higher annual contribution limits allowing one to save substantially more pre-tax. This would be on top of their IRA contributions, if they could swing saving so much.
From the employer’s perspective, 401(k) plans help to attract and retain employees. You might even “match” those employee contributions, providing a powerful retention incentive. Unlike SEPs or SIMPLE IRAs, employer contributions may also be subject to a graded vesting schedule, if desired. And should you ever need access to your money, you can borrow against your account.
Teaching our employees how to save responsibly is our responsibility. It would be great if you’d encourage them to at least open an IRA and then allow for contributions to be made through payroll deductions. Suggest they take half of any raise or bonus and invest it for retirement. Tell them that it’s possible to become a millionaire on a $50,000 salary, because it is, if they start early and have discipline.
Setting up the right plan for your business and your employees gives you a lot to think about. There are pros and cons to each of the options. It’s like the good, better, best business decisions we make every day. Any choice is a good one, as long as you get started. With tax season upon us, these savings can result in a win-win for you and your employees, a savings spree for all!
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