0:00

Hey, what's up everyone, Henry here from

0:02

disruptive money management. And today I'm going to

0:04

be talking about the simple IRA for small

0:06

business owners. More often than

0:08

not. I run into small business owners inquiring

0:11

about the difference between a simple IRA

0:13

versus, okay . It

0:15

used to be that small business owners

0:17

would utilize a simple IRA because

0:19

the cost of starting a 401k plan was

0:22

costly to implement and maintain. If

0:24

we were having this conversation, you know, five,

0:27

10 years ago, that would be the case, but

0:29

a lot has changed in the industry and establishing

0:32

a 401k is more cost effective now

0:34

than ever before. If

0:36

we go into the years, pass the

0:38

solution for those that did not want to start

0:40

a 401k was to provide simple IRA

0:42

benefits because for

0:45

one, it didn't really have much of an implementation

0:47

costs or annual maintenance

0:49

costs for the employer. Today,

0:52

we're going to be breaking down the benefits and the pitfalls

0:54

of the simple IRA so that you can make

0:56

a educated decision on whether

0:58

or not it is right for your business. The

1:01

simple IRA was designed for companies with

1:04

less than 100 employees to quickly inefficiently

1:06

provide retirement. It took a significant

1:09

components of a 401k and stripped it

1:11

down to the bare minimum. It applied

1:13

the IRS regulations in a fixed fashion

1:15

so that there were very little adjustments

1:18

that could be made with very few

1:20

adjustments and customization. The

1:22

simple IRA became the low cost

1:24

solution for businesses to

1:26

provide retirement benefits for the employees.

1:29

Additionally, it works very similarly to

1:31

a 401k. It allows you

1:33

and your employees to defer pre-tax

1:35

dollars to a qualify retirement plan

1:37

that grows tax deferred upon

1:40

obtaining retirement age of 59 and a half.

1:42

You can withdraw the funds as ordinary income

1:45

tax , simple

1:47

IRA . These are predominantly established directly

1:49

at a mutual fund or investment company, regardless

1:52

of who you have a setup through, where there it

1:54

is. An independent financial advisor

1:56

, a wirehouse bank or a credit

1:59

union. The actual underlying plan

2:01

itself is typically held directly at

2:03

a mutual fund company. These are your

2:05

American century's American funds

2:07

fidelities or T Rowe price. When

2:10

you structure a simple IRA, the

2:12

mutual fund company will create a master portal

2:14

type account under the business name. Every

2:17

subsequent employee that he likes to participate

2:20

will end up having their simple IRA retirement

2:22

account held at that mutual fund company

2:24

linked via the employer master

2:26

plan from a set

2:28

of process , there is not much Denise to take in

2:30

, be taken into for consideration. Do

2:33

simple. IRA allows all employees

2:35

who work for you and who earn at least 5,000

2:38

a year in the last two years to

2:40

contribute to the plan. Unlike

2:42

a 401k simple IRA has

2:44

no setup fees nor any ongoing

2:46

administrative fees burdened onto

2:49

the sponsoring employer and

2:52

employee can establish the plan at any time between January

2:54

and October, once established

2:56

the plan runs each year until the employer decides

2:58

to shut it down. It is essential

3:00

to note at once a plan has been established.

3:03

That plan must run throughout the year.

3:06

What I mean is this. If you have a simple IRA

3:08

that has been running for a few years, and you're ready

3:10

to transition to a 401k plan for

3:13

the added [inaudible] , which I'll go into a separate episode, you must run that simple plan through the remainder of the calendar year effectively. You will not want to start your 401k plan until January of the following December that you decide to shut down to simple IRA. So for ease of understanding, you cannot end enclose close a simple IRA. Mid-year

3:36

the plan itself must run through December

3:39

31st with notification to the company.

3:41

That that year is a final year that you're keeping

3:43

it. If you decide to start a

3:45

401k in the middle of a year, you're going

3:47

to want to postpone the implementation.

3:50

The 401k until January

3:52

1st, you just can't contribute to the 401k

3:55

until the simple has been shut down once

3:57

a plant and its benefits have an establish

4:00

. You must provide benefits throughout the entire

4:02

year. I often get asked

4:04

by small business owners during times

4:06

of financial difficulty. If they can

4:08

amend the employer contribution and

4:10

Tokyo, they can get back on their feet. And the answer

4:13

to that is no. Once you have

4:15

agreed to provide benefits to your employees,

4:18

you must maintain that benefit structure

4:20

through the rest of the year. Going

4:22

back to contributions, employees

4:24

have the ability to contribute pre-tax

4:26

dollars. Meaning any funds that they

4:28

contribute to the plan will not be subjected

4:30

to taxes. The earnings will be tax-deferred

4:33

and upon withdrawal at retirement

4:36

age, which is set at 59 and a half,

4:38

they can take the funds out and pay ordinary income

4:40

taxes

4:42

For the calendar

4:43

Year 2020, the simple IRA

4:45

allows any employee to contribute

4:47

13,500 annually and

4:50

an additional 3000. And catch-up if

4:52

they are over the age of 50, historically

4:55

the simple IRA maximum limits have been increasing

4:58

by approximately 500 a year. So

5:00

we can reasonably expect 20, 20 ones

5:02

, maximum contribution amount to be approximately

5:05

14,000 and 17,000

5:07

Woolf . The catch-up employer

5:09

contributions when it comes to the employee

5:12

, contributions to simple IRA has very

5:14

minimal leeway of modification. When

5:16

it comes to the employer contribution

5:19

as the employer, you have really two options

5:21

regarding how much you can contribute to

5:24

the simple IRA plan. You can

5:26

either match your employee's contribution dollar

5:28

for dollar up to 3%. And

5:32

if you use this route, there is no compensation

5:34

limit on the 3% rule, which I explained

5:36

just a minute. If you don't want to go

5:38

with the matching rule, then

5:40

your other alternative is to provide a flat

5:43

2% contribution to

5:45

each and every eligible employee,

5:47

regardless of what their actual contribution

5:50

to the plan is. There's 2%

5:52

does have a compensation limit of 285,000.

5:56

That if you have an employee with 300

5:59

K in comp, your 2%

6:01

is only calculated on 285,000.

6:04

Since status limit, the

6:07

compensation amount is subject to change. So

6:09

check with the IRS limits every

6:11

year, if you have this. So going back

6:14

to the match rule, there is no compensation

6:16

limit on the 3% you'll match

6:18

3% up to employees comp at

6:20

a hundred thousand 200,300,000,

6:24

breaking these down. The very first one is easy

6:26

to enough to understand if your employee

6:28

contributes 1% of their annual comp, you

6:31

will match 1%. If they're contributing to

6:33

your going to match two, to contribute three,

6:36

you're going to match three. Your buck stops

6:38

there at the three , uh , because that's

6:40

really the four of you have an employee contributing 10%.

6:42

You're just on the hook for three. The

6:45

second option is providing a flat 2%

6:47

contribution to every eligible

6:49

employee, regardless of how much

6:51

they're contributing. If they're not contributing,

6:54

but are eligible, they're going to receive the two.

6:56

If they're contributing three, they're still going

6:59

to get the two

7:01

When selecting,

7:01

Which one is most appropriate for the company, most

7:04

employers tend to choose a first option in

7:06

today's day and environment. Retirement, retirement

7:09

planning is, is not a one-sided affair.

7:11

Providing benefits is fantastic before

7:14

any of us to get to retirement on time. And

7:16

in the way we want, we should encourage

7:19

our employees to be saving. The

7:21

first option is a great tool to

7:23

promote savings for those that care about

7:25

retirement and are willing to have

7:27

some skin in the game. The

7:30

employer contribution amounts are pretty

7:32

rigid in that we cannot deviate much

7:34

from those two options. Remember

7:37

that whatever you promised your

7:39

employees must be the same throughout

7:41

the entire year. The IRS does allow

7:43

some flexibility for changes to

7:46

the employer contribution, but not by

7:48

much the flexibility to

7:50

employ contribution rules. This , if

7:52

you have previously selected the 2%

7:55

straight contribution, you can substitute

7:57

it for the 3% matching rule

8:00

for one plan year, but you , of

8:02

course, you must notify your employees of

8:04

the change. If you have previously

8:06

elective for the 3% matching contribution,

8:09

you may decrease it for one calendar

8:12

year with a minimum of 1%.

8:15

Additionally, you can only make this

8:17

change two times in a five-year

8:19

period. Again, any

8:22

changes must be sent to

8:24

your employees.

8:26

The simple

8:27

IRA does not have any flexibility

8:29

in restricting the employer's contribution

8:32

upon employee termination. The

8:34

best way to explain to us is to provide

8:36

you have an example of a 401k clause on

8:39

a 401k. You can structure an employee match

8:41

obligation that requires an

8:43

employee to work for you for X number

8:45

of days and hours before becoming

8:48

eligible for entry into the plan. Additionally,

8:52

in a 401k, you can also require

8:54

that they remain employed throughout the entire

8:56

year to receive the employer contribution.

8:59

That type of limitation is not available in

9:01

a simple IRA, does a big missing inception

9:04

when provided the benefits must be

9:06

given to an employee. What are they leave

9:08

or pass away before the end of

9:10

the year, when it comes

9:12

to calculating the employer contribution

9:14

and more specific , a 3% match, you

9:17

must consider the employee's entire

9:19

year salary for purposes of calculating

9:22

a 3% rule. This is regardless

9:24

of when to enter into the plan. For

9:26

example, say you have an annual salary

9:28

of 50,000 and I start contributing

9:30

to my employer's simple

9:33

IRA plan on September 1st, let's

9:35

say I contribute $1,536

9:39

from September 1st through December

9:42

31st, my employer would have to match 3%

9:45

of my entire year's compensation

9:47

of $50,000, which

9:50

in this example is a $1,500

9:52

match. It doesn't matter that I

9:54

only contributed to the plan

9:57

during the last four months at a year. A

9:59

common misconception is that the

10:02

business owner would calculate

10:04

the salary from September

10:06

1st to December 31st and based

10:08

a 3% match on that compensation

10:11

thinking, Hey, that's when I entered into

10:13

the plan, right? So that's when they should be calculating.

10:16

No, the 3% is based on entire

10:18

year's compensation. When

10:21

you have a simple IRA, any employee

10:23

contributions, withheld from their paychecks

10:26

have a maximum timeframe upon deposit.

10:29

The IRS rule is that withholdings must

10:31

be deposited within 30 days

10:33

after the month in which the deferrals were made.

10:36

However, the department of labor has a more

10:38

strict rule. You must have the funds

10:40

deposited within seven days

10:42

of the pay date in which the funds were deducted.

10:45

I always suggest erring on the side of caution

10:48

and making the deposits as soon as possible.

10:50

The fact is when funds are deducted

10:53

from your employee's paycheck, you have

10:55

a fiduciary responsibility to

10:57

have a transfer to their accounts as quickly

10:59

as possible. And extended

11:01

holding on employee funds is a big

11:03

red flag. When it comes to retirement plans,

11:05

you don't want to mess with the IRS and

11:07

the department of labor when it comes to these

11:10

things, there is no easy way to explain

11:12

why you had constructive receipts and

11:14

did not promptly transfer it. When

11:18

it comes to the employer, contributions, you have

11:20

some more leeway. The employer contributions

11:23

must be made before you file your

11:25

business taxes, including any

11:27

requested extensions. What

11:30

that means is that if you have a 3%

11:32

match or a straight 2% contribution,

11:34

you don't necessarily have to put that portion

11:36

into the account until the following

11:38

year is up. When you file

11:40

your taxes directly speaking,

11:43

you can make the entirety of the year's

11:45

employer contribution up to the deadline.

11:47

Typically October 15th of the following

11:49

year, if you filed an extension, your

11:52

contributions as the employer are

11:54

of course completely tax-deductible as

11:56

an expense from

11:59

a simple IRA cost standpoint.

12:01

I started this episode by saying that there are very

12:04

minimal set up costs for an employer. In

12:06

a later episode, I'll compare a simple IRA to

12:08

the 401k and a side-by-side analysis.

12:10

So you can see it in greater detail.

12:13

Still

12:14

The low to absolute no startup cost

12:16

is probably why to simple IRA appeals to most

12:18

small businesses. But look, you

12:20

know, and I know that there are no free lunches

12:22

in this world. The simple IRA is not

12:24

free because most of the cost is

12:26

embedded in the simple IRA investments.

12:29

The plan itself is almost always tied to a mutual

12:31

fund company. A though you may not

12:34

have a set up costs or reoccurring

12:36

annual annual admin costs. The

12:39

mutual fund company still has to make their money somehow.

12:42

And they do this by embedding the cost into

12:44

the contributions that are going into the plan.

12:46

For the most part, the mutual fund company will assess

12:49

an upfront commission charge on every

12:51

dollar contributing to the plan is,

12:53

is not in common for this upfront sales load

12:56

to be in the range of five and 6%.

12:58

On top of that, they can have pretty

13:00

expensive expense ratios. Well

13:02

above 1% that gets assessed

13:05

annually on the money that is within

13:07

the plan because the simple

13:09

IRA is tied to one mutual fund company.

13:11

You can only select investments within that one

13:13

company. For example, if your plan

13:16

is at fidelity, you can only have

13:18

access to a preset menu of just fidelity

13:20

investments. The same goes, if

13:22

you have your plan at American century, all

13:24

investment options are only through investments, American

13:27

century building a well-rounded investment

13:29

account often involves using different

13:31

fund companies for different investments

13:34

in today's modern environment.

13:37

For example, in a 401k, I

13:39

may have a fun lineup with 15 different investment

13:41

options, but those 15 different options

13:43

would come from very different companies. I

13:46

may have an extremely low cost S and P 500

13:48

fund from BlackRock, a

13:51

large cap growth oriented fund from

13:53

fidelity, maybe a small

13:55

and mid cap growth fund from Alliance

13:57

Bernstein and international exposure

14:00

from Vanguard. I may

14:02

have bonds from PIMCO in a stable value

14:04

from another company, as well as a full

14:07

suite of target date funds from Tia

14:09

or T Rowe price. The

14:11

idea behind his level of diversification

14:14

is that I want to utilize the best in

14:17

class for the sector that we wish to have

14:19

exposure to and

14:21

provide low cost options for

14:23

defeat conscious investor.

14:25

There is no way in how you can say that

14:28

one fund company out there does

14:30

the best at everything. I'm sorry,

14:32

but fidelity American funds, T Rowe,

14:34

price Vanguard, and all of you investment companies

14:36

out there, you all have strengths and weaknesses.

14:39

It's a simple truth to say that

14:41

you have a full suite of the best investment options

14:44

in every sector is simply BS.

14:47

It's like saying McDonald's makes

14:49

the best fast food burger for every type

14:51

of meat out there. It's not true

14:53

because we all know Chick-fil-A

14:55

makes the best chicken sandwiches. This

14:59

level of investment selection, diversification

15:02

is not possible in a simple IRA. You

15:04

can pick from their limited menu of

15:06

investment options and kind of go from

15:08

there from a bigger

15:11

perspective of using simple IRAs.

15:13

I want to address integrations and financial

15:15

wellness. I get it that running

15:18

a business is not easy. There are a lot

15:20

of things to address. You've got employee

15:22

morale, business, marketing, and advertising

15:25

to consider. You've got to consider your business

15:27

growth profits expenses,

15:30

and we have even touched upon customer satisfaction.

15:33

The last thing you want is to have to spend hours

15:35

each week running the retirement plan and

15:37

making sure contributions are made correctly.

15:41

The modern 401k plan has gotten better

15:43

at technology to integrate with most

15:45

payroll providers to have what is called

15:47

a three 60 solution adjustments

15:50

and modifications from an employee's contribution

15:52

amounts are automatically reflected

15:54

in the payroll company, allowing seamless

15:56

calculation of the payroll deductions

15:59

and subsequent deposits. Very

16:02

few simple IRAs have

16:04

this type of integrative solutions, which

16:07

means either you or someone in human

16:09

resources must spend time every pay period

16:11

to perform the calculations. You'll

16:14

need to enter it into the system correctly

16:16

and make sure the funds are deposited promptly.

16:19

If your employees are making changes to the contributions,

16:22

they're going to be constantly running back to the person in

16:25

HR , laying them know if your business

16:27

is low in employee count that may not be an issue,

16:30

but as your company grows, an employee count

16:32

more time will be needed to run the administrative

16:34

aspect and a more manual data

16:37

entries that there are more errors

16:39

are prone to be made 360

16:42

integrated retirement plans just

16:45

about almost eliminate these processes,

16:47

allowing the systems to speak

16:49

to one another directly, thus effectively

16:52

saving you time, money

16:55

and fiduciary liability. Additionally,

16:58

simple IRAs have very low to no

17:00

focus on financial wellness employee

17:03

information on their online websites

17:05

will generally provide them with information

17:07

relative to how much they have contributed,

17:10

what the employer contribution was and

17:12

their account's internal rate of return

17:16

with the retirement crises that we are undergoing.

17:18

I can tell you that employees need more than

17:20

just a return rate. Let me ask

17:22

you this. If I told you that your

17:25

account balance was $250,000

17:28

and your return rate this year was

17:31

7%. What does that tell you?

17:34

Well, all it tells you is that your account

17:36

balance is $250,000 and

17:38

your investments returned 7% this year.

17:41

What it doesn't tell your employees is what are

17:43

not they're on track for retirement. It

17:45

doesn't provide projected retirement

17:47

income, which is what we want to know.

17:50

Yes, knowing my account balance as well

17:52

and fine. But what employees want to know

17:55

is how much their income can

17:57

be replaced when they retire.

18:00

The also want to know what they must do.

18:03

If that retirement income number is

18:05

not to their liking, they want to

18:07

see if they will have enough money to

18:10

sustain their entire retirement

18:12

timeframe. And unfortunately,

18:14

knowing only the balance and a rate

18:16

of return is insufficient.

18:20

Additionally, simple IRAs don't provide

18:22

much in terms of tools for

18:24

other items of financial wellness, they

18:27

don't offer the debt payoff calculators

18:29

or the other articles of importance necessary

18:32

for retirement planning. All

18:36

right, well, I know that was quite

18:38

a bit to take in, but that was the simple

18:40

IRA. In a nutshell,

18:42

the simple IRA has historically been

18:44

recommended as a simple and low cost

18:47

solutions for business owners wanting

18:49

to provide retirement benefits still,

18:53

as I illustrated, the actual underlying

18:55

costs can be quite substantial.

18:58

Additionally, the lack of financial

19:00

wellness integration tools

19:03

and investment selection makes

19:05

it a dinosaur for corporate

19:07

retirement plans. The simple

19:10

IRA may sound appealing because

19:12

of the lack of startup costs. And if

19:14

you don't care that your employees are bearing the majority

19:16

of the costs, if you don't plan on contributing

19:19

whatsoever, maybe just, maybe

19:21

it's a viable option. Still.

19:23

If you are a business owner who cares

19:26

about the big picture of low costs,

19:28

financial guidance and diversification,

19:31

I strongly recommend considering a 401k

19:34

plan instead. And that's it

19:36

for today. My friends, I hope you enjoyed this episode

19:38

on the simple IRA. In my upcoming

19:40

episode, I will do a similar deep dive

19:42

into the 401k and why the 401k

19:45

is not as expensive as one might think

19:47

in today's modern time until

19:49

next time, I wish you all a safe,

19:52

healthy, and productive week. The

19:58

podcast reflects the opinions of the hosts. The

20:01

podcast is for informational purposes only,

20:03

and is not intended to serve as a recommendation

20:05

to buy or sell any security

20:08

and is not an offer or sale of a security.

20:11

The podcast is also not a research report

20:13

and is not intended to be the basis of any

20:16

investment decision. Securities

20:18

are offered through United planners, financial services,

20:21

a member of FINRA and SIPC

20:24

investment advice is offered through juncture

20:26

wealth advisors, LLC, a registered

20:29

investment advisor, juncture

20:31

wealth advisors, LLC, and United

20:33

planners are not affiliated.