If some recent studies accurately reflect the state of retirement savings in America, our nation could be facing a retirement crisis. For example, one study conducted by Fidelity Investments, a multinational financial services corporation, determined that over half of all Americans (ages 25 and older) have less than $25,000 set aside specifically for retirement, and 28% of those Americans have saved less than $1,000 for retirement. Clearly, many people aren’t prepared.
Some popular choices
As a dealership owner, you can help your employees save for retirement by offering them a retirement plan. Doing so also can yield tax benefits for your dealership, serve as a valuable employee recruiting tool and help boost employee retention.
But which type of retirement plan should you choose? Following is a description of three of the most popular types of retirement plans:
401(k) plans. The term “401(k)” has become synonymous with retirement saving in the United States. Your employees will contribute a percentage of their salaries to their 401(k) accounts. The amounts are typically deducted from their pay each period and deposited to their accounts automatically. Your dealership can match their contributions if you like, at whatever percentage you choose (such as 50 cents on the dollar), but you’re not obligated to do so. These employer contributions can be subject to a vesting schedule.
All 401(k) plans can be funded with pretax or Roth deferrals. Contributions made on a pretax basis are taken from employees’ paychecks before taxes are deducted. Earnings on these contributions also grow without taxation. Employees pay taxes only after they start taking distributions in retirement.
Roth 401(k) contributions are made on an after-tax basis. These contributions don’t permit a current tax savings, as with a pretax 401(k). But employees can withdraw funds income tax-free after age 59½, if they’ve held the account for five years or longer.
Simplified Employee Pension (SEP) plans. Also known as a SEP IRA, this is a low-cost retirement plan that’s usually easier to administer than a 401(k) plan. SEP accounts are generally available to S and C corporations, partnerships and LLCs of any size.
You and your employees will open accounts and your dealership will make tax-deductible contributions into them. Unlike 401(k) plans, employees can’t contribute to SEPs — all contributions are made by your dealership. SEP contributions grow on a tax-deferred basis, and money contributed is immediately vested to employees.
Note that SEP accounts generally must be established and funded by your tax-filing deadline (or by the extended due date if you file a valid extension).
SIMPLE IRAs. SIMPLE stands for Savings Incentive Match Plan for Employees. Like the SEP, this is a low-cost, simplified retirement plan without the startup and operational costs or nondiscrimination testing and participation requirements often associated with a 401(k) plan. With a SIMPLE IRA, both your dealership and your employees can contribute money to accounts set up for your employees. SIMPLE IRAs are available to most dealerships with 100 or fewer employees.
SIMPLE IRAs have mandatory employer contributions. The employer contributions made by your dealership are tax-deductible, and your employees’ contributions are made on a pretax salary deferral basis. All SIMPLE IRA contributions and earnings (employer and employee) are immediately vested to employees.
Other qualified plan options
There may be other qualified retirement plans available to your dealership as well. Speak with your tax advisor for more guidance in choosing the right plan for your dealership and your employees.