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401k

The key to retirement security is picking the right plan for your business

If you’re a small business owner or you’re involved in a start-up, you may want to set up a tax-favored retirement plan for yourself and any employees. Several types of plans are eligible for tax advantages.

401(k) plan

One of the best-known retirement plan options is the 401(k) plan, which provides for employer contributions made at the direction of employees. Each participating employee elects to have a certain amount of pay deferred and contributed by the employer on his or her behalf to an individual account. Employee contributions can be made on a pretax basis, saving employees current income tax on the amount contributed.

Employers may, or may not, provide matching contributions on behalf of employees who make elective deferrals to 401(k) plans. Establishing and operating a 401(k) plan means some up-front paperwork and ongoing administrative effort. Matching contributions may be subject to a vesting schedule. 401(k) plans are subject to testing requirements, so that highly compensated employees don’t contribute too much more than non-highly compensated employees. However, these tests can be avoided if you adopt a “safe harbor” 401(k) plan.

For 2019, the maximum amount you can contribute to a 401(k) is $19,000, plus a $6,000 “catch-up” amount for those age 50 or older as of December 31, 2019.

If the plan document permits it, participants can even borrow from a 401(k) account, within certain limits.

Other tax-favored plans

Of course, a 401(k) isn’t your only option. Here’s a quick rundown of two other alternatives that are simpler to set up and administer:

1. A Simplified Employee Pension (SEP) IRA. For 2019, the maximum amount of deductible contributions that you can make to an employee’s SEP plan, and that he or she can exclude from income, is the lesser of 25% of compensation or $56,000. Your employees control their individual IRAs and IRA investments.

2. A SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” A business with 100 or fewer employees can establish a SIMPLE. Under one, an IRA is established for each employee, and the employer makes matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The maximum amount you can contribute to a SIMPLE in 2019 is $13,000, plus a $3,000 “catch-up” amount if you’re age 50 or older as of December 31, 2019.

Annual contributions to a SEP plan and a SIMPLE are controlled by special rules and aren’t tied to the normal IRA contribution limits. Neither type of plan requires annual filings or discrimination testing. Unlike 401(k) plans, though, participants can’t borrow from a SEP plan or a SIMPLE.

Many choices

These are only some of the retirement savings options that may be available to your business. The knowledgeable CPAs at P&R can discuss the alternatives and help find the best option for your situation. Contact us to set up an appointment if you have questions: Office@CPAsite.com, or 904-396-5400.

© 2019


Tax Law Changes That May Affect Your Business’s 401(k) Plan

Think about recent tax law changes and your business: There’s the new 20% pass-through deduction for qualified business income (QBI) and the enhancements to depreciation-related breaks. There’s also the reduction or elimination of certain business expense deductions. However, if your business sponsors a 401(k) plan, then there are also a couple of recent tax law changes you need to be aware of.

    1.  Plan loan repayment extension:

A great way to get a low-interest loan would be to borrow from your 401(k). But what happens if you leave the company (voluntarily or otherwise)? I’ll tell you; you have 60 days to either roll over the 401(k) into another qualified account or repay the loan. If the loan is not repaid, it then goes into default and is reported to the IRS as taxable income (and be subject to a 10% early distribution penalty if the employee was under age 59½).

However, under The Tax Cuts and Jobs Act (TCJA), starting 2018 any loans taken from your 401(k) now allows more time for the borrower to repay. Instead of the 60-day window, borrows now have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties. To sum up, if you borrowed from your 401(k) and leave your job in 2018, you now have until April 15, 2019 to repay the loan.

    2.  Hardship withdrawal limit increase:

Some 401(k) plans allow for hardship withdrawals. If the 401(k) plan does include Hardship, an employee is allowed to take the withdrawal if their hardship falls under it’s criteria: purchase of a new home, damage/repair expenses for your home, payment expenses to avoid evictions or foreclosure on your home, unexpected medical costs, tuition/educational fees, or burial/funeral expenses. Before, a person could only borrow what they contributed into their 401(k). Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Now, a person can not only withdraw their own contribution, but they can also withdraw their employer matched contributions plus earnings on contributions. This deduction will be considered taxable income and subject to the 10% early distribution tax penalty.

While this may sound beneficial, many people do not save enough for retirement. In addition, it is taking Americans longer to pay back loans thus missing out on potential tax-deferred growth during that time. Hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.

So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. The team at Patrick & Raines CPAs have many years of experience helping small business owners and financial planning.  Contact us at Office@CPAsite.com or 904-396-5400 if we can help you!

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Frequently Asked Questions

Q.

Should I consult a CPA if I’m starting a new business?

A.

Yes. You’ll need to discuss the best organization for your company for tax purposes as well as numerous other issues relating to operations, including pricing, inventory, payroll, liability and profit...

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