HomeSpecial ReportsThe perfect time to kickstart your retirement plan is now

The perfect time to kickstart your retirement plan is now

Because of the comprehensive retirement reform package known as Secure 2.0, which was passed into law at the end of 2017, small firms now have additional incentives to assist their workers in planning for retirement.

According to research conducted by Anqi Chen and Alicia Munnell of the Centre for Retirement Research at Boston College, which makes use of 2019 data from the United States Bureau of Labour Statistics, less than half of the smallest firms offer a retirement plan to their employees. The incentives, which include tax credits that are especially attractive to businesses with 50 or fewer employees, are designed in part to encourage small companies to create retirement plans for their employees.

However, this is beginning to shift, in part as a result of increasingly alluring tax benefits and a highly competitive labour market, both of which are making every perk more important in the competition for talent. According to a recent survey study that was released on May 2 by the nonprofit Transamerica Institute and its Transamerica Centre for Retirement Studies, among businesses that do not already provide a 401(k) or similar plan, 42 percent of business owners have indicated that they are likely to begin sponsoring a plan over the next two years. Concerns about the budget were highlighted by 31% of those who do not anticipate sponsoring a strategy within the foreseeable future.

Before discounting plan sponsorship, particularly for reasons related to cost, small firms should assess the possible financial advantages that Secure 2.0 has to offer, and then only then should they discount plan sponsorship. As these advantages are subject to qualifying restrictions as well as individual circumstances, it is prudent to seek the advice of a tax professional in order to assist you in weighing the many possibilities available.

Amy Vaillancourt, senior vice president of workplace product, strategy, and design at Voya Financial, said that these credits, as a general rule, “add up to sizeable benefits for employers looking to start plans.”

The following are some fundamental aspects of the law, as well as some considerations to make while attempting to strike a balance between the costs and benefits, from the perspective of both the employer and the employee.

A sizable tax credit may significantly reduce the expenses of setting up a plan.

A beefed-up credit was developed by Secure 2.0 as a means of offsetting the administrative expenditures that are connected with launching a qualified retirement plan. The Act extended the rate of coverage up to 100 percent of eligible start-up expenditures for companies that had between one and fifty workers, increasing it from 50 percent before. There is a limit of $5,000 a year that can be used throughout the course of three years. Larger enterprises, defined as those with 51 to 100 workers, are still qualified to receive up to fifty percent of the plan’s initial setup expenses.

Additionally, there are tax benefits associated with employer contributions.

In addition, firms with up to one hundred workers that participate in Secure 2.0 and make employer payments to a new defined contribution plan are eligible for a new tax credit that is valid for the next five years. This credit is meant to serve as an incentive for small firms to make contributions to the retirement savings of their workers. The precise sum of the credit is determined by a variety of variables, including the total number of qualified workers and the length of time since the inception of the plan.

Employers with fewer than 50 workers are eligible for the credit, which is of particular benefit to them. According to Marc Scudillo, managing officer of EisnerAmper wealth management and corporate benefits, the credit for these organisations is up to $1,000 per year for each employee earning less than $100,000, and the amount of the credit diminishes by 25% each year beginning in the third year. This information was provided by EisnerAmper.

The tax credit is calculated using a sliding scale for companies that have between 51 and 100 workers and is intended for bigger firms.

According to Kelly Gillette, a partner with the accounting firm Armanino, small firms that use the credit should discuss the matter with their tax preparer in order to have an understanding of how the deductions for employer contributions would be decreased.

A lesser credit for automatic enrollment might help offset some of the expenditures.

Small businesses are eligible for a tax credit in the amount of $500 if they establish or update a 401(k) plan and include an automatic enrollment option that is active for the first three years of the plan’s existence. Gillette said that even though this feature isn’t necessary until the year 2025, small companies have the option to implement it early and get the credit sooner. Even though auto-enrollment is likely to boost participation, which may result in more expenses for a small company, the credit may be able to help offset some of these additional expenditures.

A starter 401(k) plan does not need a contribution from the employer.

Scudillo said that employers may now make available to their staff members a “starter” 401(k) plan, which enables them to benefit from any relevant administrative tax credits despite the fact that the employers would not be making contributions on their staff members’ behalf. There are a lot of small companies out there that either don’t want to or can’t afford to give an employer match, but giving workers the choice to do so may be a huge benefit for everyone involved.

According to a recent poll conducted by Natixis Investment Managers, 71 percent of respondents said that they anticipate their principal source of income in retirement to come from what they save on their own in an employer-sponsored defined contribution plan.

According to Scudillo, this newly developed form of plan may be valuable for helping workers prepare for retirement as well as for attracting new staff. Small firms that do not already have a strategy in place have the opportunity to choose this alternative.

The Act gives additional consideration to the families of service members.

It is common for military spouses to be unable to put money away for retirement since they may not be able to maintain employment long enough to qualify for retirement benefits or become vested in their employer’s pension plan. Under certain circumstances, Secure 2.0 will provide qualified employers with a credit of up to $500 per military spouse who is enrolled in the defined contribution plan offered by the firm. This credit is contingent on the occurrence of a number of predetermined events.

For instance, military spouses must be instantly eligible to join the plan within two months of the date of their first employment with the company. A military spouse must also be eligible for any matching or non-elective contribution that he or she would have been eligible for otherwise after two years of service after the plan eligibility requirements have been met in order to participate in the plan.

This credit is good for three years; however, it is not applicable to workers with very high salaries.

Options are now available for Roth IRAs for companies of a certain size.

The Roth IRA option may now be made available to company owners inside SEP IRAs and SIMPLE IRAs thanks to Secure 2.0. According to Eric Bronnenkant, director of tax at Betterment, “these are often used by small businesses because they tend to have fewer administrative responsibilities than a 401(k).” According to Bronnenkant, not only does the ability to provide a Roth option in these plans have the potential to benefit the owner directly, but it is also beneficial for reasons of attracting and retaining employees.

Legislation does not exclude anyone who engages in self-employment.

Additionally, the retirement law makes a multitude of benefits available to all people, even those who are self-employed. After age 50, individuals have the opportunity to raise the amount of money they put towards their retirement savings. This is one of the advantages. People who are 50 years old or older will have a higher catch-up contribution ceiling of $7,500 in 2023, up from the previous limit of $6,500 in 2022. Gillette has said that beginning in 2025, the catch-up payment maximum will rise even more for individuals who are between the ages of 60 and 63 as part of the Secure 2.0 programme.

In addition, the age at which individuals are obliged to begin taking required minimum distributions from their conventional 401(k) or traditional IRA has risen. The age at which a person is required to begin taking RMDs will be increased to 73 years old beginning in 2023 thanks to Secure 2.0. Also, beginning in 2024, there would be no need for required minimum distributions (RMDs) for Roth 401(k) and Roth 403(b) plans. This will place these plans on par with a Roth IRA, which might be another big advantage, according to Gillette.

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