With the new year upon us, it seems everyone is taking a fresh look at their lives, their financial lives in particular. A new year brings new opportunities to do better and get closer to achieving our goals.
Some of your clients have retirement savings goals that they need an extra boost to get closer to in 2019. For your clients who own businesses, sponsoring a retirement plan could very well be the answer to their problems. There are a number of different options available, each with different deferral limits. Below are some of the options, categorized by how much income can be deferred with each.
Up To $16,000
The next step up from an IRA in contribution limits is an employer-sponsored SIMPLE 401(k) or SIMPLE IRA. The IRS increased contribution limits for these plans for 2019. So now employee deferrals are capped at $13,000. Those over age 50 can make a $3,000 catch-up contribution for a total possible deferral of $16,000.
Up To $62,000
Chances are that $16,000 a year will not be enough to really move the needle on your clients’ retirement savings goals. The next level of retirement plans available for your business owner clients to sponsor include traditional 401(k)s, SEP IRAs, and Solo 401(k)s. While they each have different features, advantages, and disadvantages, they all have the same contribution limits for 2019.
Employees are allowed to make elective deferrals of up to $19,000. The total contribution limit that covers both employee contributions and employer contributions is now $56,000. Business owners are both employees and employers, so they can take advantage of the full $56,000. Those over age 50 are permitted a $6,000 catch-up contribution, for a total possible deferral of $62,000 for the year. It is important to remember that employer contributions must be calculated using certain formulas, so not all business owners will be able to contribute the maximum.
Up To $300,000+
Though $62,000 seems like a lot, if you have clients nearing retirement age, that may still not be enough. In situations like these, the best option for your client is likely a cash balance plan, either alone or combined with a 401(k) and profit sharing plan. Cash balance is a kind of defined benefit plan where the annual contribution limit is not a fixed amount, but, rather, it varies by age. The older your client, the more they will be allowed to contribute.
A client born in 1950 could potentially contribute over $300,000 to a cash balance plan alone in 2019. By combining it with a 401(k) and profit sharing plan, a client ten years younger could do the same. Even clients as young as their early 30s are able to defer more with a cash balance plan than a 401(k), and the deferral potential only grows with age.
Setting Up A Retirement Plan
Clearly, sponsoring a retirement plan is a great option for your business owner clients that need to save more for retirement. Deciding to establish a retirement plan is easy; deciding which kind is best is where it gets hard. While contribution limits play an important role in the decision, there are many other factors that must be considered.
When choosing a retirement plan, it is important to understand all of the options and the advantages and disadvantages of each so that the plan is a blessing and not a burden on the business owner. If your client is interested in establishing a retirement plan for their business in 2019, you should partner with an experienced pension consultant to help them make the right decision for their business and their financial future.
At FinancialFocus Retirement Plan Services, we partner with financial advisors like you to assist their clients in choosing and designing the best retirement plan for their specific business and unique situation. Email me today at info@ff401k.com to discuss how we can help you help your clients.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.