Today, we invite you to take a look at how a ‘free’ retirement plan, such as a SEP or a SIMPLE IRA,  may actually cost your clients thousands of dollars every year and result in lost opportunity to save for retirement and reduce tax liability.

On the surface, IRA-based arrangements and prototype retirement programs cost nothing, or very little, to set up and administer. But as you venture below the surface and delve into the numbers you quickly realize that “free” retirement programs can be very costly due to higher tax exposure and a smaller nest egg at retirement.

Consider this client who approached her advisor to help shelter some income for retirement:

•   55-year-old sole owner of an S-corporation
•   $79,500 in W-2 wages
•   $100,000 left in her corporation
•   Wants to put $60,000 away for retirement

To help determine the best option available, the advisor brought us in to look at SEP and SIMPLE IRA’s, a prototype Solo 401(k) plan and a traditional defined benefit plan. Below are the outcomes for each option considered:

• A SIMPLE IRA capped the contributions at $16,885, leaving $43,115 in taxable income
• The SEP did a little better by providing a $19,875 contribution, leaving $40,125 exposed to taxes
• The Solo 401(k) did better than both IRA based plans, arriving at a $42,875 contribution, but was still almost $20,000 short of the target.

Of course, increasing W-2 wages would increase contributions to these plans, but she still would have fallen short of the savings goal. What’s more, tax savings would have been reduced by the additional payroll tax liability associated with higher W-2 earnings.

The defined benefit plan provided the most attractive solution! Even after taking into account the fees associated with a defined benefit plan, the defined benefit plan was clearly the best pick. She was able to achieve her goal of putting away $60,000 without having to increase her W-2 earnings and therefore optimize tax and retirement savings. As you can see in this example, so-called “free” or low cost arrangements can come with high hidden costs in the form of lost retirement savings opportunity and higher taxes. With non-owner employees in the mix, the cost would have been even higher. A more sophisticated plan design frequently allows clients to meet their funding objectives and maximize their tax savings net of associated costs.

Our Invitation: The end of the year presents the perfect time to review retirement plans sponsored by individuals and businesses large and small, and in the process, shine in front of your clients and increase assets under management.

As your retirement plan consultants, we are prepared to conduct a three-point evaluation:

1. Plan Design: review options and identify an optimum solution.
2. Retirement Accumulation: find the savings vehicle that meets specified objectives.
3. Tax Savings: work to reduce the unnecessary tax exposure through tax benefits inherent in qualified plans.

We help you gather the data. We do all the number crunching. You review the results and help your client make the decision that’s best for them.

NOW is the best time for a check-up!  

As always, your First Allied Retirement Services subject matter experts are ready to help. Call us at 888-926-0600 or send a message to pensions@firstallied.com.