Author Topic: New Small Business: SIMPLE IRA, 401k or Nothing at All?  (Read 451 times)

Snowman99

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New Small Business: SIMPLE IRA, 401k or Nothing at All?
« on: May 26, 2019, 05:13:43 AM »
Hello All:

Recently formed a new business with several partners.  We are all expecting to make around $150-$200k each this year, and maybe some as high as $300k.  In my old job, I had no matching of 401k, but would max out anyway in addition to contributing to Roth IRA for me and spouse (saving about $30k/year in tax advantaged retirement accounts).   I'm taking the lead on setting up a retirement account.  We have four employees.  They make between $40k-$60k a year each.

Been perusing through our retirement plan options and I'm stuck on what we should implement for this new business: SIMPLE IRA, 401(k), or nothing at all.  Here are the pros/cons, as I see it:

Do Nothing

If we do nothing, I can contribute to a traditional or Roth IRA (as can all partners).  Would probably go traditional to get the tax savings.  My spouse and I would max out limits for 2019 at $12,000.00, and will probably contribute about $18,000.00 to a taxable account to remain consistent with our savings, but we will be less incentivized to do this (i.e. we might be tempted to just spend it on home renovations, pay down HELOC, etc.) as there will be no "use it or lose it" incentive to optimize the tax advantages.

Doing nothing incurs no administrative cost and no additional compensation cost for our employees.  There will be no time spent on dealing with the account administration.  Time spent is significant, as each partner bills time at several hundred dollars an hour and time is essentially money.

SIMPLE IRA

SIMPLE IRA is very easy to set up and administer and can be done directly with Vanguard.  Employees can contribute up to $13,000.00/year.  Our business is required to match contributions up to 3% of salary, or approximately $1,500.00/year for each of our employees.  This exposes the company to about $6,000.00 in additional payroll costs in addition to Vanguard's $25/year fee for each account, yielding a total cost of $6,225.00 to the company.

If owners make $200,000.00 or more, the contributions would be equal to or greater than the $19k I was used to contributing to 401k ($13k + 3% of salary), but total employer/employee contributions would be capped at $26,000.00 (assuming a partner makes $433k/year, which is unlikely).

Will probably make about $180k this year, which will mean I can contribute $13,000.00 to the SIMPLE IRA plus an additional 3% match to yield a total of $18,400.00.  I would still be able to use the Roth on top of that for an overall retirement savings of $30,400.00.  If I make more than $193k, though, the Roth starts to phase out and we will not be able to use that vehicle after $203k.

401k

401k plans allow a combination of employer and employee contributions up to around $55,000.00.  To accomplish this, they cannot be top heavy and must pass anti-discrimination tests to ensure that non owner employees are likewise getting a piece of the employer contributions.  To avoid this test, "safe harbor" plans are usually favored, which requires an approximate 4% match of employer contributions to the plan, creating an approximate $8,000.00 additional payroll exposure to the company.

401k plans are expensive to implement.  Employee Fiduciary, which appears to be least expensive, charges about $2,000.00 / year in addition to 0.08% of overall plan assets.  If everyone maxes out their plan, that looks like about $350k in assets for year 1 only, or $2,800.00, which will only go up as years go on.  There are also other fees for forms, administration, etc.  For purposes of brevity, I'm just going to assume the total annual cost will be about $5,000.00 in the early years.  Average 401k cost for small business appears to be between $4k-$10k.

This yields a total cost of $13,000.00.

Thoughts

This has all lead me to question the overall utility of tax advantaged accounts.  My old job offered a 401k, so of course I took advantage of it.  Now, I have the choice of whether to implement a 401k.  The administrative burden and cost seems to just be a pain in the rear end and a waste of time.  I can remember the bookkeeper from my old company (another small business) always on the phone with the plan administrator for the 401k.  There were payroll mistakes that always needed correcting, forms to fill out, and a considerable amount of time was spent just dealing with the 401k regulations and paperwork.

The SIMPLE IRA appears to be a much less burdensome retirement savings vehicle, and its implementation will allow us to continue to save more or less along the same amounts as we did.

The 401k offers the huge advantages, however, to save up to $55k in retirement.  I'm not sure if we are willing to put this much away a year at this point, as we have some bills that need paying, but one cannot deny how attractive this is. 

The "doing nothing" option has made me wonder how much we are actually saving in these tax advantage accounts.  I'm investing in 100% stocks and if I buy and hold those and only cash out when I retire, do I really save that much in taxes?  When I retire, we will be making essentially no income and long term capital gains only kicks in if we make more than $78k this year.  Dividends will be taxed as income, of course, but am I really saving that much by implementing these retirement plans for our business?

Interested to hear any thoughts from people on this forum and if anyone else has had experience in setting up retirement accounts with companies around this size.

FYI- I looked into SEP IRA, which basically will not work for us because it requires uniform application of the same income percentage every year.  There is no way we will be able to do that the way our company works.

Thanks and looking forward to your insight.

teen persuasion

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #1 on: May 28, 2019, 09:42:44 AM »
As a low income employee, whose employer does not currently offer any retirement account options, I'd like to shout at you: DO SOMETHING!

It's so frustrating to be limited to only the IRA contribution limit.  It also can be costly to low income workers who could be eligible for EITC.  We are fortunate that DH has access to a 401k - his contributions there allow us to receive some great refundable credits.

The EITC rules mean that payroll traditional 401k contributions reduce w2 wages reported on the 1040, as well as reducing AGI (EITC tests both, and your credit is the lower of the results).  TIRA contributions can only reduce AGI, so they are useless for increasing EITC since w2 wages are unaffected.  The EITC phaseout rate is 21%, so a $10k 401k contribution could increase your refundable credit $2100.  As my state matches EITC at 30%, you could increase your state refundable credit another $630.  Of course, that's ignoring the state and federal tax avoided on the 401k contributions, too.  Combined, I believe it creates a 21% + 6.3% + 10% +4% = 41.3% marginal rate on contributions to 401k accounts.

If, instead of saving in retirement accounts, you save in taxable, you could be making yourself completely ineligible for EITC at any income.  There is an investment income cliff of $3500 annual, I believe.

Then there's the college financial aid angle.  Savings in retirement accounts are not reported on the FAFSA, so don't increase the EFC.  Taxable investments are included in EFC calculations, increasing EFC (reducing aid).  At certain income levels, the reduction to AGI of retirement contributions can make you eligible for either the Simplified Needs Test (which skips reporting assets), or the Auto EFC = $0.  So lack of retirement account options could be a double whammy - expected to use taxable account balances (earmarked for retirement) instead for college expenses, plus made ineligible for low income special conditions tests due to inability to contribute the same amounts to government recognized retirement accounts that most other families can.

cchrissyy

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #2 on: May 28, 2019, 11:59:57 AM »
Your pricing for the 401k option looks higher than it needs to be.

I'm currently intrigued by the below, which has all the vanguard funds I hoped for.
I like Gusto as a payroll company and just recently learned they offer this.
 https://gusto.com/product/401k-plan
it's $500 set up then $8 per person per month and nothing charged as a % of assets
« Last Edit: May 28, 2019, 12:02:38 PM by cchrissyy »

Snowman99

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #3 on: May 28, 2019, 04:38:04 PM »
Your pricing for the 401k option looks higher than it needs to be.

I'm currently intrigued by the below, which has all the vanguard funds I hoped for.
I like Gusto as a payroll company and just recently learned they offer this.
 https://gusto.com/product/401k-plan
it's $500 set up then $8 per person per month and nothing charged as a % of assets

Thanks for the heads up on Gusto/Guideline.  This looks like a much more attractive option for 401k. 

teen persuasion

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #4 on: May 29, 2019, 07:11:20 AM »
Quote
   SIMPLE IRA is very easy to set up and administer and can be done directly with Vanguard.  Employees can contribute up to $13,000.00/year.  Our business is required to match contributions up to 3% of salary, or approximately $1,500.00/year for each of our employees.  This exposes the company to about $6,000.00 in additional payroll costs in addition to Vanguard's $25/year fee for each account, yielding a total cost of $6,225.00 to the company.

Double check on the fees - my employer is talking about creating a SIMPLE plan for us, so I looked at Fidelity, Schwab and Vanguard.  I thought the fee at Vanguard was $25 per FUND per account, unless your balance at Vanguard exceeds $50k.  I knew my employer couldn't afford to pay this for us, so it would land on each of the participants.  I already have enough in my Roth IRA to have the fee waived, but the others do not.  I didn't like the list of approved mutual funds for a SIMPLE IRA at Fidelity (all expensive managed funds, no inexpensive index funds).  I'm pushing for Schwab - no cost to set up, no extra fees to users.  And I certainly don't want the Wells Fargo plan/guy the board of trustees were leaning towards by default, just because "well, we don't know anything about this stuff, and we trust him."  I've seen the outrageously convoluted "plan" he has for the endowment fund, and his AUM fees - no thanks.

Snowman99

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #5 on: May 30, 2019, 02:59:18 AM »
You are right about the Vanguard $25 per fund charge.  I have enough in Vanguard as well to avoid that, but I am sure partners/employees do not.  I was leaning toward Fidelity, as I have 529s in low cost index funds with them and they have been rather user friendly.  I was not aware that their SIMPLE fund line up did not include index funds though and I will take a look and also look at Schwab.

Yes, someone was pushing their "financial guy" and  I vomited in my mouth.

I read reviews about Guideline 401k (partner with Gusto) on Bogleheads, and I have mixed feelings.  They bailed on a call scheduled with me and their customer service rather sucks if we are going to take the Bogleheads reviews at face value.


teen persuasion

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #6 on: May 30, 2019, 06:39:51 AM »
Here's the link to Fidelity's SIMPLE IRA investment options.  Lots of different places, so I just first looked at Fidelity's own list of approved funds.  When I was disappointed, and honestly overwhelmed trying to find funds I'd be happy with, I knew coworkers who were less investment savvy (and much less interested) would freak out and shut down.

https://fundresearch.fidelity.com/mutual-funds/ira-fund-families

thesis

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #7 on: May 30, 2019, 08:53:32 AM »
Mustachian as an individual looks different than Mustachian as a business. (not that I have much room to talk on the business side...)

If I have the option between a good company that offers a 401k and a good company that does not offer a 401k, all other things being equal, I'm going to pick the 401k. Some people on this forum have even described going through the hoops to allow their employees to do a Mega Backdoor Roth. Do shop for a good plan, but do also  be good to your employees :)

SeattleCPA

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #8 on: May 30, 2019, 11:13:06 AM »
Four comments from a small CPA firm owner who's tried pretty much all of the retirement plan options for own business and then continually helps small business clients deal with this...

1. The SEP-IRA thing is really very attractive based on its simplicity... it doesn't work well if you have employees who want a pension... but it's basically harder to screw up. Also, I say this fully aware of the impact it has on backdoor Roth mechanics.

2. The Simple-IRA is what we use now... and one of these is often optimal because it's free, easy and most small business employees don't want or can't save more than its elective deferral limit.

3. Pension fund options like a Simple-IRA and also of course a 401(k) plan regularly prove too tricky for people to make work. Every year we have at least a few clients who totally screw up the paycheck deductions--often with really messy tax consequences. Paying the CPAs to clean up this sort of stuff surely eats up any incremental advantage of a 401(k) for a small business owner. And that's even before considering 401(k)s often cost more.

4. Adding extra options to your 401(k) like employee loans? Oh my gosh, you really don't want to do that unless you've got a real accounting department.

Kronsey

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Re: New Small Business: SIMPLE IRA, 401k or Nothing at All?
« Reply #9 on: May 30, 2019, 11:54:39 AM »
You are right about the Vanguard $25 per fund charge.  I have enough in Vanguard as well to avoid that, but I am sure partners/employees do not.  I was leaning toward Fidelity, as I have 529s in low cost index funds with them and they have been rather user friendly.  I was not aware that their SIMPLE fund line up did not include index funds though and I will take a look and also look at Schwab.

Yes, someone was pushing their "financial guy" and  I vomited in my mouth.

I read reviews about Guideline 401k (partner with Gusto) on Bogleheads, and I have mixed feelings.  They bailed on a call scheduled with me and their customer service rather sucks if we are going to take the Bogleheads reviews at face value.

Another small biz CPA here - Just thought I would provide my perspective.

Guideline doesn't have the world's best customer service. That is true. They've even missed scheduled phone meetings with me and I'm a "partner" in that I refer them a decent amount of plans. But they do provide exactly what they say they will provide. I have helped many clients setup the combo of Gusto for Payroll and Guideline for 401K. Once setup, it works just as it says it does.

Like with most all of these tech software startups in the small biz space, you are getting a lot more software than you are getting man power. The trade off is you get slower customer support in exchange for lower prices/fees.

But at $8/month per employee with no other bogus AUM fees, I don't think any rational personal would expect the best customer service around. There would be no way to make profit if these companies relied on humans to do all the work.

If you have any other questions, feel free to PM me. My own company's 401K is at Guideline as well if that tells you anything.