Teaching small businesses how to create retirement funds

Volunteers from the Aiken office of SCORE (Service Corps of Retired Executives) recently held a workshop to teach small businesses how to create retirement plans ranging from simple to sophisticated.

Led by Will Rogers and Damon Cline of Confident Life Wealth Management at Ameriprise Financial Services, LLC., the workshop looked at differences between defined-contribution plans and defined-benefit plans.

Cline said there are two basic plans businesses can consider, a Simple Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA.

“These SEP plans are fully employer-funded, so the employer makes all the contributions on behalf of eligible employees,” he explained. “Basically, employers can deduct up to 25% of their eligible compensation for contributions made on behalf of employees. The ability to take a business tax deduction that could be appealing in the future, depending on your business, the owner can adjust the contributions depending on the business results.”

Damon Cline

To be eligible, an employee must be at least 21 years of age, have worked three of the past five years, and received minimum compensation of $750.00 in 2024.

“First, the employer establishes a general plan, okay, then the owner and each eligible employee, they established their own IRA to receive SEP contributions,” he said. “It’s basically a regular IRA account that’s designed to receive SEP contributions, and the contributions are made directly into the participant’s account.

Turning to the SIMPLE IRA, Cline said it was created in the 1990’s as a 401(k) alternative for smaller companies.

“It works very much like a 401(k) in that it lets the employee make pre-tax contributions. If your employee is older than 50, they get a catch-up,” Cline said. “Employers can choose to offer matching contributions to a certain limit. These are generally cheaper and easier to administer than a 401(k) plan, since it’s not subject to some of the rules that 401(k) falls under. The business owner is not liable for the investments. It’s not like a pension plan where the company is on the hook for their investments.”

Paul Wade

Paul Wade, managing partner with SME CPA’s office in Augusta, touched on the tax benefits of retirement plans for small businesses during a recent Small Business Roundtable, sponsored by the North Augusta Chamber of Commerce.

“It started in 2023, it’s still in effect for 2024 but there are new tax credits. Basically, there’s a credit that will cover the cost of up to $5,000 the administrative costs to start the plan itself. And then, there are tax credits to cover the employer match for employees,” he said.

Wade said there are benefits beyond the strictly financial to consider for small businesses giving thought to creating a retirement plan.

“Obviously it’s a very good benefit for your employees, particularly for a growing business,” he said. “It’s something additional that you want to offer to your employees to help retain them, to help attract them, definitely a good employee benefit.”

Will Rogers

Rogers advised small business owners to take the time to think and decide what they want to achieve by setting up a retirement account.

“Don’t let the tax savings drive the funding. Do take advantage of tax benefits, but if you want to take care of yourself, set up a plan that favors you. If it’s in your spirit to take care of all of your employees, set up a plan that takes care of the employees and get tax benefits while you’re doing that,” he said.

More information about creating retirement accounts and other workshops offered by the Aiken chapter of SCORE is available at: https://www.score.org/greateraiken

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