Looking for a Simple Way to Reward Employees?

Getting from point A to point B should be simple
Putting a retirement plan into place for your employees should be Simple. [image credit: eglobalis.com]
Ever wonder how some of your peers offer expensive benefits packages to their employees and manage to stay afloat? Have you thought about putting a retirement plan into place to reward your employees, but gotten stuck navigating complicated filing requirements and trying to make sense of confusing language like ERISA, Third Party Administrator, and Form 5500?

The IRS recognizes that it can be both costly and time consuming to set up a 401(k) plan if you’re a small business. Complicated rules such as avoiding being “top-heavy,” choosing between profit-sharing options versus matching options, and high startup costs can be seemingly insurmountable hurdles to putting a retirement plan into place.

For those businesses looking to avoid the complicated, the IRS has a solution – the (appropriately named) Simple IRA. Simple stands for Savings Incentive Match Plan for Employees. It is intended to be an easy, cost-effective way for employers with fewer than 100 employees to reward them and provide access to a retirement plan for their future security.

Unlike the traditional 401(k), a Simple IRA has no annual filing requirements. This might not sound like a big deal, until you see what the form 5500 looks like. Not a lot of fun to have to think about every year. And potentially even less fun to pay someone (a third party administrator) to do.

In addition, most Simple IRAs can be set up with no start up fees to the employer. It’s not uncommon for a mutual fund company to to charge a flat fee in addition to what the third party administrator charges for its services for a 401(k). If an employer intended to offer a match, that’s two gatekeepers she has to pay just to offer her employees free money. Not so with a Simple IRA.

Drawbacks

For all their simplicity, there are some trade-offs employers should consider carefully before establishing a Simple IRA.

When establishing Simple IRA plans, employers have the choice to either offer every employee 2% of his pay, or a 3% match if he puts in 3%. For example, if Joe employee makes $50,000 per year, the employer has the option to a) put in $1,000 (2% of Joe’s pay) on top of Joe’s salary, or b) match up to $1500 if Joe puts in $1500 of his own money. Either way, the employer is on the hook to make contributions, and can only reduce the match twice in a 5 year period.

Additionally,  all employees are always 100% vested. That means that the match the employer makes is the employee’s to keep forever, even if they leave the next day. This is quite a contrast to vesting schedules in 401(k) plans, which are designed to give employees incentive to stay – or risk losing some of their 401(k) matching. The even bigger pitfall here is if an employee leaves mid-year and the employer is offering a flat 2% non-elective contribution, because the employer is required to make good on that contribution.

While higher than IRAs, Simple IRA contribution limits are lower than those of 401(k) plans – $13,000 for 2019, compared to $19,000 for 401(k) plans. If there are quite a few employees over the age 50, then you’ll want to consider whether the lower catch-up contribution limit would be detrimental to those getting started saving late.

It’s important to weigh the costs and benefits to any type of retirement plan you’re considering – Simple IRA, 401(k) or otherwise.

The Bottom Line

We’ve only scratched the surface of the ins and outs and of Simple IRAs, their pros and cons, and how they compare to 401(k) plans. If you’re an employer, it’s important to weigh your options carefully before implementing a retirement plan. Not sure where to get started? Check out “Help with choosing a retirement plan” on the IRS’s website, or contact us today to get answers so you can decide what type of plan is best for you.

5 Fast Facts About 529 Plans

What is a 529 plan?

A 529 plan is an investment vehicle that allows investment growth to be used tax-free for qualifying education expenses.

Such expenses include Tuition, Room & Board, Textbooks, and other equipment like laptops and printers.

NEW for 2018: While 529 plans have traditionally been used to fund college expenses, the new tax law allows for those funds to be used to pay tuition at qualifying K-12 educational institutes. Be aware that this limited to $10,000 per beneficiary (student) per year.

What happens to a 529 plan if it isn’t used?

Any earnings not used for qualifying education expenses will be subject to both ordinary income tax and a 10% penalty.

For example, if Tom, age 50, has $20,000 put away for his son to go to college, and his son decides he wants to go live abroad for 10 years instead of going to college, Tom has the right to withdraw the funds. If $10,000 of those funds is investment returns, then he’ll be a 10% penalty, and be taxed like he took home a $10,000 paycheck on top of what he normally makes from his job. The good news for him: unlike other custodial accounts, money in 529 plans is fully under the control of the owner. It doesn’t belong to the beneficiary.

One of the most common concerns I hear is that if 529 plans aren’t used for college, you lose the money. Don’t get me wrong – the IRS wants you to use the money for college, but the possibility of it all being taken away would be too steep of a bargain for most investors to stomach!

Do I need to invest in my state’s 529 plan?

No. You can use any state’s 529 plan, and some states (including Pennsylvania) offer an state income tax deduction if you contribute to a 529 plan – regardless of which state’s plan you use. This gives the saver total freedom to choose what plan makes the most sense for them, and still get a tax-break.

Why might an individual in Pennsylvania use Virginia’s 529 savings plan? Truth be told, both states offer great investment options, but an individual looking for active investment management won’t currently find it in Pennsylvania’s Investment Program, which is managed by Vanguard. Virginia’s plan, on the other hand, is managed by the Capital Group. While the fees are higher, their track record is second to none when it comes to long-term performance – even compared to Vanguard.

How often do I have to put money in the account after I set it up?

The answer to this question is never. Pennslyania’s 529 plan allows investors to get started with $15. In theory, you never have to put money in again – but it wouldn’t be wise not to, would it? Most individual contribute on a monthly or annual basis. It’s not uncommon for Grandparents to contribute their required minimum distributions to a grandchild’s college savings plan. Which leads us to our next topic…

Who can contribute to a 529 plan?

Anyone can contribute to a beneficiary’s 529 plan. Without getting too complicated about gifting rules, a couple can contribute $15,000 each per year to one account, and each of that couple’s parents could contribute $15,000 each per year as well. That’s a total of $90,000 that can sit and grow tax-free for education expenses!

A note about gift taxes: generally, most people will not have to pay gift taxes. Everyone is afforded a lifetime exclusion that goes well into the millions. Still, it’s easiest to give $15,000 or less, because it’s one less tax form you’ll have to fill out at the end of the year.

Conclusion

While they have a number of restrictions, 529 plans are loaded with benefits, many of which have been expanded with the passage of the Tax Cuts & Jobs Act.

Thinking type of college savings plan? Concerned about making the right decision, but not sure where to start? We understand that a phone call or one-on-one conversation is easier for many. E-mail hello@providersandfamilies.com, we’d be honored to offer our assistance!

 

What We’re Watching This Week (and Next)

Consumer Confidence Index (CCI):  Despite hitting all-time highs earlier this year, the CCI dropped from 128.8 in May to 126.6 in June.1

Released on the last Tuesday of every month (in this month’s case, the 31st), the consumer confidence index is a random sampling of 5,000 U.S. households that measures how optimistic or pessimistic consumers are about the economy.

 “Consumers’ assessment of present-day conditions was relatively unchanged, suggesting that the level of economic growth remains strong,” said Lynn Franco, director of economic indicators at the Conference Board. “While expectations remain high by historical standards, the modest curtailment in optimism suggests that consumers do not foresee the economy gaining much momentum in the months ahead.” Source

New Home Sales: data released in last month showed that new home sales in May were up 6.7% over April, beating analyst expectations.3 In 2017, real estate construction contributed a whopping 6% of Gross Domestic Product (GDP) to the economy, down from its peak of 8.9% in 2006.4 It should come as no surprise that real estate construction was a big contributor to the unemployment rate during the recession. Real estate’s impact on the broad U.S. economy cannot be understated, so it will be interesting to say what June’s numbers look like when they are released on Wednesday.5

Gross Domestic Product (GDP): The first major tax overhaul in more than 30 years went into effect in January, resulting in an increase in after-tax corporate profits by more than 8%. Some economists anticipate that GDP will be as high as 5.3%, up from 2% in Q1 of this year.6 That said, take note:

“The United States is engaged in tit-for-tat trade tariffs with its major trade partners, including China, Canada, Mexico and the European Union, which analysts fear could disrupt supply chains and undercut business investment and potentially wipe out the fiscal stimulus.” Source

1 https://www.marketwatch.com/story/consumer-confidence-dips-in-june-but-still-strong-2018-06-26

2 https://www.investopedia.com/terms/c/cci.asp

3 https://www.marketwatch.com/Economy-Politics/Calendars/Economic

4 https://www.thebalance.com/how-does-real-estate-affect-the-u-s-economy-3306018

https://www.advisorperspectives.com/dshort/updates/2018/06/25/new-home-sales-up-6-7-in-may-better-than-expected

6 https://www.cnbc.com/2018/06/27/final-reading-on-first-quarter-2018-gdp.html

Correction on 7/24/2018: previously, we stated we’d be watching the for updated CCI on July 24th; however, the last Tuesday of the month falls on July 31st. We have updated the headline of the article to include next week.

3 Things Whole Life Insurance Won’t Do For You (And 5 Things It Can)

Life insurance is confusing.

When it comes to whole life insurance, there’s a lot of myths, opinions, and partial truths, all of which find themselves muddled together with facts. Where does one begin if they want a straight answer?

Like any puzzle, it’s helpful to break it down into pieces and work backwards.

Let’s start with what whole life insurance will not do for you:

  • Make you rich
    • Whole life insurance is not going to make you a multi-millionaire. While there is cash value, that cash value builds slowly, over time.
  • Outperform the stock market
    • Did I mention that life insurance grows slowly? Don’t look at whole life insurance as a replacement of your stock market investments. (Better yet, look at not as an investment, but as an asset.)
  • Save you money on insurance right now
    • Tired of paying for life insurance through work? Term insurance premiums going up every year? Whole life won’t solve either of these problems. And that’s because whole life does more.

Now, let’s talk about what whole life insurance can do:

  • Help you build wealth
    • The key to building wealth is paying yourself first. Over time, the cash values that build inside your policy can be used while you’re alive.
  • Encourage discipline
    • It can be tempting to pause your savings strategy when more immediate demands for your money present themselves. However, there are some things that just cannot be paused – your mortgage payment or your groceries, for example. Whole life insurance is much the same: if you want the benefits, your end of the bargain is to pay it – no matter what.
  • Give you a death benefit you’ll never lose
    • A retiree losing their life insurance coverage. A father with a term policy expiring after 20 years of payments. A mother who needs life insurance, but now has a chronic health condition that disqualifies her from almost all types of insurance. These are actual circumstances my clients have faced which have resulted in unfavorable insurance rates, or lack of insurability altogether. Got whole life insurance? You’ll never have to worry about losing coverage because of the curveballs life throws you, as long as you pay your premium.
  • Save you money on taxes
    • Turns out that whole life can help protect against that second certainty in life. Used properly, the cash value of life insurance can be used tax-free. Imagine being able to fund your lifestyle with income that is not only tax-free, but not actually considered income at all. Why does that matter? Well, if it’s not considered income, that means your other income will be taxed at a lower rate.
  • Pay for the cost of a long-term care
    • In the morning, you get out of bed, brush your teeth, use the bathroom, take a shower, get dressed, and have breakfast. It’s a routine that it almost unfathomable to imagine needing help with. And because it’s a routine that’s repeated daily, it’s expensive to pay for help when we do. Enter whole life insurance with a chronic illness or long-term care benefit. Our bodies deteriorate as a natural part of the aging process, making daily activities increasingly difficult. Whole life insurance is permanent: no matter how old one gets, the protection is there – and that protection can be used to offset the cost of routine care.