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.