3 Mistakes to Avoid When Starting a Retirement Plan

1. Choosing the Wrong Plan Type

There are several plan types to choose from when starting a retirement plan—401(k), SEP IRA, SIMPLE IRA— but they aren’t all created equal. Selecting the right plan type for your business can significantly affect your ability to save for retirement, costing you and your employees thousands. Most of the time a 401(k) is the right choice because it offers maximum tax advantage and maximum flexibility. However, many business owners open SEP or SIMPLE IRAs and quickly regret it. What’s wrong with SEP and SIMPLE IRAs?

SEP IRA Drawbacks: 

1. Employer contributions are required on an annual basis and must be made pro-rata. This means you may be required to give your employees up to 25% of their income annually in the SEP IRA.
2. Employees can’t contribute their own money to the plan.
3. All employees must be enrolled, including part-time and seasonal employees.
4. All contributions are immediately vested.

SIMPLE IRA Drawbacks:

1. The maximum annual contribution is only $16,000 (significantly lower than a 401(k) plan), which is rarely enough to help business owners save for retirement or mitigate taxes.
2. Employer contributions are required on an annual basis (3% match or 2% non-elective), making this plan relatively costly when compared to its limited tax benefit.
3. All employees must be enrolled, including part-time and seasonal employees.
4. All contributions are immediately vested.
5. SIMPLE IRAs have very strict rules about when they can be upgraded to a 401(k). This often causes business owners to be trapped in their SIMPLE IRA for years. Read SIMPLE IRA FAQs to learn more.

We’ve made it easy to find out which plan type may be best for your business with our Plan Selector Tool. 

Business owners can be trapped in a SIMPLE IRA for years, which can severely limit their ability to save.

2. Not Hiring a Specialized Adviser

You have options when it comes to hiring a retirement plan adviser. But some options are better than others.

1. No adviser: You’re on your own when it comes to implementing plan responsibilities, including choosing investment options. This may seem like a low-cost option, but fund fees, fund performance, and extra administrative work can make this choice more costly than you think.
2. Non-specialist adviser: This type of adviser does not specialize in retirement plans. They might help with some education or investment services, but it's unlikely they have the experience to help you understand many aspects of managing your retirement plan.
3. Specialist adviser: With an experienced adviser who specializes in retirement plans, you will receive more help navigating the complexities of managing a retirement plan, easing your administrative burden, and are more likely to have access to higher quality investment options for your plan.

If you don’t have the time or expertise to spend on operational aspects of plan administration, want to make sure you’re getting quality support, and want to avoid low-quality investments, an adviser who specializes in retirement plans is a smart way to go.

3. Waiting too Long

Putting off the decision to start a 401(k) plan can put you and your employees behind when it comes to retirement savings. A new start-up plan tax credit also makes it more affordable than ever to begin a retirement plan.

Tax Credit:

The tax credit is applicable for the first 3 years of the plan and can be as high as $16,500. It’s not a tax deduction, it’s a bona fide tax credit, which means actual money in your pocket.

1. The annual tax credit will be the greater of $500, OR $250 for every eligible non-highly compensated employee (NHCE).
2. The annual tax credit may not exceed $5,000 or 50% of total eligible plan costs.
3. Plans that add automatic enrollment get a bonus tax credit of an additional $500 per year

The tax credit is applicable for the first 3 years of the plan, and can be as high as $16,500.

Let's Make a Plan

Fisher's experienced retirement plan specialists can help you avoid these and other common retirement plan mistakes. Contact us today to begin building the right plan for you and your employees.