Comprehensive Overview of Retirement Plans for Small Businesses
Please bear in mind while we are following the laws, regulations, and taxation of each plan like all other investment advisory firms, we believe that we often have some advantages on plan cost, investment cost, and selection compared to other Investment Advisory firms. These advantages are typically found in reducing what we believe are unnecessary costs in the investments themselves, such as using Exchange-Trade Funds vs traditional mutual funds. See our article on EFTs vs mutual funds cost comparison. Also, we do our money management in-house, so you would only be paying one advisory fee. If the money management is outsourced you would typically pay an additional cost of the outside money management. We have cut out the middle-man so to speak. As always this is meant as educational information. Further, we do not give legal or tax advice. Please consult with a lawyer or a tax professional regarding legal and taxation matters. Let’s dive in. What type of Retirement Plan should you consider for your Small Business? Here are the different types: SEP IRA (Simplified Employee Pension) SIMPLE IRA (Savings Incentive Match Plan for Employees) Individual 401(k) Individual Roth 401(k) Traditional 401(k) Roth 401(k) Profit Sharing Plan Money Purchase Plan Defined Benefit Plan Deferred Compensation Plan This guide includes key features, costs, fees, and taxation details, along with illustrations to clarify the differences. SEP IRA (Simplified Employee Pension) Overview: A SEP IRA is designed for self-employed individuals and small business owners. Employers make all contributions on behalf of employees. Key Features: Contribution Limits: Up to 25% of each employee’s compensation, with a maximum of $66,000 for 2024. Flexibility: Employers can vary contributions each year. Eligibility: Employees must be at least 21 years old, have worked for the employer in 3 of the last 5 years, and have received at least $750 in compensation in the current year. Costs and Fees: Setup Fees: Generally low or $0 Annual Fees: Minimal or $0, usually lower than other plans. Investment Fees: usually lower than other plans as we use Stocks, bonds and ETFs Investment Advisory Fees: Defends on Asset Level Taxation: Tax Advantages for Employers: Tax-Deductible Contributions: Employers can make tax-deductible contributions to their employees’ SEP IRAs. These contributions are considered a business expense and can be deducted from the employer’s taxable income, reducing the overall tax liability. Flexibility in Contributions: Employers have the flexibility to decide how much to contribute to SEP IRAs each year. They can choose to contribute up to 25% of each employee’s compensation, up to a maximum contribution limit set by the IRS. This flexibility allows employers to adjust contributions based on business profits and cash flow. No Ongoing Contribution Requirement: Unlike some retirement plans that require annual contributions, SEP IRAs do not require ongoing contributions. Employers can choose whether or not to make contributions each year, depending on their financial circumstances. Tax Advantages for Employees: Tax-Deferred Growth: Contributions made to a SEP IRA grow tax-deferred until withdrawn. This means that investment earnings within the SEP IRA are not subject to annual taxation, allowing the account balance to grow more quickly over time. No Taxes on Contributions: Employees do not pay taxes on contributions made by their employer to their SEP IRA. These contributions are made with pre-tax dollars, reducing the employee’s current taxable income. Taxation: Tax Control in Retirement: During retirement, when withdrawals are made from the SEP IRA, the distributions are taxed as ordinary income. However, retirees may have more control over their tax situation, such as withdrawing funds during years with lower tax rates. Potential Lower Tax Bracket in Retirement: In retirement, individuals may find themselves in a lower tax bracket compared to their working years. This can result in paying less tax on SEP IRA withdrawals than they would have paid on contributions during their working years. Penalties Early withdrawal penalties apply before age 59½ (10% penalty). Pros and Cons: Pros Cons High contribution limits Employees cannot contribute directly Simple administration Only employers can contribute Flexible annual contributions The same contribution percentage for all SIMPLE IRA (Savings Incentive Match Plan for Employees) Overview: A SIMPLE IRA is suitable for businesses with 100 or fewer employees. Both employer and employee contributions are allowed. Key Features: Contribution Limits: Employees can contribute up to $15,500 annually ($19,000 if 50+). Employers must either match up to 3% of salary or make a 2% non-elective contribution. Eligibility: Employees who earned at least $5,000 in any two preceding years and are expected to earn at least $5,000 in the current year. Costs and Fees: Setup Fees: Generally low. Annual Fees: Typically minimal. Investment Fees: usually lower than other plans as we use Stocks, bonds and ETFs Investment Advisory Fees: Defends on Asset Level Taxation: Tax Advantages for Employers: Tax-Deductible Contributions: Employer contributions to employees’ SIMPLE IRAs are tax-deductible as a business expense. This deduction reduces the employer’s taxable income, resulting in lower tax liability. Tax Credit for Small Employers: Small employers may be eligible for a tax credit of up to $500 per year for the first three years after establishing a SIMPLE IRA plan. This credit helps offset the costs of setting up the plan. No Employer FICA Taxes: Employer contributions to SIMPLE IRAs are not subject to FICA (Federal Insurance Contributions Act) taxes, including Social Security and Medicare taxes. Tax Advantages for Employees: Pre-Tax Contributions: Employee contributions to a SIMPLE IRA are made with pre-tax dollars, reducing the employee’s current taxable income. This lowers the amount of income subject to federal income tax, resulting in immediate tax savings. Tax-Deferred Growth: Contributions and investment earnings within a SIMPLE IRA grow tax-deferred until withdrawn. This allows the account balance to grow more quickly over time, as taxes are not owed on investment gains each year. Lower Tax Bracket in Retirement: In retirement, individuals may be in a lower tax bracket compared to their working years. Withdrawals from a SIMPLE IRA during retirement are taxed as ordinary income, but retirees may pay less tax on these withdrawals
Interest Rates are Decreasing while Unemployment Rates are Increasing
Recent developments in the U.S. economy have heightened the potential of a recession, driven by a combination of decreasing interest rates and rising unemployment. The Federal Reserve’s July 2024 report indicated a spike in the unemployment rate to 4.3%, the highest since 2021. This has fueled concerns as employers added fewer jobs than expected. The Sahm Rule Recession Indicator, a tool that signals the onset of a recession when the unemployment rate increases by 0.5 percentage points or more over a short period, recently hit 0.53%, further reinforcing fears of an economic downturn. The situation is exacerbated by declining interest rates, which are often a response to slowing economic growth but can also signal an impending recession if coupled with rising unemployment. Adding to these concerns is the Buffett Indicator, which compares the total market capitalization of U.S. stocks to the nation’s GDP. Currently, this indicator suggests that the market is significantly overvalued, another potential red flag for investors worried about economic stability. The convergence of these factors—rising unemployment, falling interest rates, and the elevated Buffett Indicator—suggests that the U.S. economy may be on the brink of a recession, though it remains to be seen whether these indicators will fully materialize into a broader economic downturn. We have been working on and still are repositioning your portfolio as high growth is not to be expected in the near future. You will see a small mix of small/mid-cap being added as those companies typically borrow money. Since money is becoming cheaper to access they could potentially benefit. FYI, big companies such as Amazon, Google, etc. have so much money on hand that they typically have little concern about interest rates as they self-fund their projects. Hafnia Financial, Inc. is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Insurance products and services are offered and sold through Jan Gleisner an individually licensed and appointed insurance agent. CA Ins Lic # 0D77385.
Money is Green (Not Red or Blue)
Money Is Green (Not Red or Blue) In the whirlwind of election campaigns, it’s easy to get swept away by the flood of promises made by politicians. Each candidate paints a picture of the future in vivid hues, promising prosperity, job growth, and economic stability. However, as investors, we must remember that money is green—not blue or red. While political rhetoric may capture headlines and shape public sentiment, it should not dictate your investment strategy. Political campaigns are filled with noise. Candidates from both sides make bold claims about how their policies will either rescue or ruin the economy. This noise can be particularly distracting for investors trying to make sense of their portfolios in a volatile environment. But history has shown us time and again that the stock market is more resilient and less tied to political outcomes than we might think. The economy, influenced by global events, technological advancements, and consumer behavior, does not always move in lockstep with the promises or actions of politicians. The economy and the stock market are two different entities. While economic indicators like GDP growth, unemployment rates, and inflation are important, they do not always correlate directly with stock market returns. The market is forward-looking, often pricing in future expectations rather than current realities. A booming economy does not guarantee soaring stock prices, just as a sluggish economy does not always lead to a market downturn. Therefore, we focus on what makes sense for your money, not what the economy or politicians dictate. Your investment strategy should be guided by your financial goals, risk tolerance, and time horizon, not the latest political headlines. Diversification, long-term planning, and disciplined investing are the cornerstones of a successful portfolio—regardless of who holds office. While staying informed about potential policy changes that could impact specific industries or sectors is important, reacting impulsively to political developments can lead to costly mistakes. In conclusion, while politicians may color their promises in shades of blue or red, your money remains green. The noise of political campaigns should not overshadow the fundamentals of sound investing. By focusing on what truly matters—your financial well-being and long-term goals—we are here to help you navigate the ups and downs of the market with confidence, no matter who is in power. Remember, in the world of investing, it’s not about choosing sides; it’s about making informed decisions that align with your financial objectives. Hafnia Financial, Inc. is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Insurance products and services are offered and sold through Jan Gleisner an individually licensed and appointed insurance agent. CA Ins Lic # 0D77385.
