Welcome to Retirement A to Z, I’m Sue Burnett w Monarch Financial Advisors, and this series focuses on QRPs. There are a lot of moving pieces with these plans, and the rules are complicated and complex, so we’re going to break them into smaller pieces – 26 pieces, to be exact, from A to Z, with maybe a few extras thrown in for good measure.
This is one of the Episode J’s – just for you! We’re focusing on what retirement plans are appropriate for a particular business, based on answers to a few simple questions: what industry are you in, how many owners do you have, and how many employees do you have. That’s it! If it’s just you and your spouse, that counts as no employees, by the way – your spouse would be considered an owner, solely because they’re married to you.
In this episode, we’re going to focus on a realtor – one owner, no employees.
The first option is a SEP, or Simplified Employee Pension Plan. This plan is easy to set up – on the IRS website, there’s a one page form to fill out, and that’s it! It’s also easy to run ongoing - there’s no filing requirements, so there’s no extra administration that needs to be done. Once that one pager is filled in, you set up an individual SEP-IRA for yourself, and you’re good to go! The most you can put in for a given tax year is 25% of your eligible pay, and the least you can put in is $0! Each year, you decide what contribution amount is right for you within that range - you pick what you want to contribute each year - which makes this a great plan for businesses like yours that have unpredictable cash flow and may need the flexibility. The contribution is made by the business into the SEP IRA, and is a top line tax deduction for your business – it needs to be made by your tax filing date with extensions in the next year – so, for 2020, you’d have until you file your taxes in 2021 to make the contribution.
These plans are great for their flexibility and low cost, but there are a few disadvantages – first, if you want to contribute more than 25% of your pay, or more than $57,000 in a year. Second, there’s no guarantee as to what this balance will be at retirement, because you could put in a lot in one year or nothing the next. So if either of these is an issue for you, we need to move onto option 2 – a defined benefit plan, or a pension plan.
There are a few different types – traditional ones, cash balance plans, 412€3 or fully insured plans – these differ only by how they look or what the investments are. But regardless of which one you pic, these plans solve the disadvantages of the SEP – they provide a guaranteed benefit at retirement, based on a formula in the plan document, and they allow contributions of upwards of $250,000 per year for you, if your age and pay allow for that. These really help accelerate your retirement savings, and will help provide you with a known level of income when you decide to retire. The down side is that you have to make a contribution every year, and there will be administration costs because filings need to be done. Think of these sort of like social security – you pay in every year, based on your income and a formula, and there’s a guaranteed benefit when you get to retirement age. Same concept – but we can set the contributions to be in a range you’re comfortable with, and to go up and down based on your pay, if you need that.
What if you want a little of each – you’re good with making a fixed contribution each year, but would like to contribute more in the up years? Well, you can’t have both a defined benefit plan AND a SEP – SEPs are stand alone plans, and you can’t have any other plans when you have one of those. But you CAN have both a defined benefit plan and a profit sharing plan. A profit sharing plan is really similar to a SEP – the main differences is that if you’d like life insurance as an investment, a profit sharing plan can handle that, and if you have a pension plan, you can also have a profit sharing plan. This is the best of both worlds – you’d have your defined benefit plan providing a guaranteed benefit and requiring contributions that you’re comfortable with, and you’d also have your profit sharing plan, where you could put in $0 in a bad year, and up to 6% of your pay plus a 401(k) contribution of up to $19,500 in a good year.
Wrapping it up – there are really 3 main choices for realtors when it comes to qualified retirement plans – SEPs, that are easy and flexible, a defined benefit plan with higher contributions and deductions and a guaranteed benefit, or a defined benefit plus a profit sharing plan for a little of each. Which is best for you? Depends on your cash flow, and how much you’re looking to contribute. Give us a call and we can run some proposals for you to see how things look – there’s no charge for them, and it’ll give you a sense of what’s possible.
Wanna learn more? Tune into the other a to z podcasts where we continue to break down these wonderful and complex plans into bite size pieces. Remember, how do you eat an elephant? 1 bite at a time. Have any questions? Shoot me an email at MonarchFinAdvis@gmail.com. Thx for listeining in and have a great rest of your day!