Are you feeling overwhelmed by the complexity of small business retirement plans?
In this episode, Zacc Call and Laura Hadley are joined by their Capita colleague, and recurring guest, Tyson Long to analyze and provide detail surrounding various retirement plan options for small business owners. Their suggestions are not one-size-fits-all but rather catered to consider factors like the number of employees and annual saving goals. Listen as they highlight the need for more simplification and better options for small business owners.
Throughout the episode, Zacc, Laura, and Tyson discuss:
[00:00:00] Zacc Call: Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether
[00:00:08] Laura Hadley: you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps.
[00:00:17] Zacc Call: Our mission is to guide motivated people to become financially successful.
Zacc Call: Welcome to The Financial Call. This is Zacc. We have Laura and Tyson Long with us as well today. Tyson, you've been on several episodes with us, right?
[00:00:29] Tyson Long: A couple, yeah. Two or three. Two, maybe. Two, yeah.
[00:00:33] Zacc Call: We pull Tyson in when it's a mess and we need to figure out like, okay, that's not a typical thing to talk about.
[00:00:38] Zacc Call: Let’s pull Tyson Long in here.
[00:00:40] Laura Hadley: Tyson's across the hall from Zach and so often Zach and I will be talking in his office and asking questions and we'll just hear an answer across the hall and sure enough it's Tyson.
[00:00:49] Tyson Long: Oh, you're too kind, yeah.
[00:00:51] Zacc Call: retirement plans and if I'm being just super straightforward this whole space could use an overhaul Legally, like I would love Congress to come in and just completely wipe this area clean Make them way more simple and give people better options So until then we're gonna explain what options are available and then we will go through How to make a decision based on your situation.
[00:01:15] Zacc Call: So let's dive right in anything to add before we get going
[00:01:18] Tyson Long: There's an account called a simple account that's not so simple. I'm sure we'll talk about that.
[00:01:23] Zacc Call: We’ll talk about that.
[00:01:24] Laura Hadley: So we're talking about retirement plans for business owners.
[00:01:27] Laura Hadley: So if you own a business, maybe [00:01:30] you have some employees, maybe you don't, maybe it's just your spouse. What plan is right for you for saving for retirement?
[00:01:35] Zacc Call: Just super hard for small business owners because they're usually an expert within their business and this is completely outside of it and all it does is take time away from earning more money and I feel like business owners are usually hypersensitive to their own time because they're being asked to do everything.
[00:01:51] Zacc Call: They have to say no to a lot of things and this is usually the area to which they say no. It's like I just can't deal with that right now.
[00:01:57] Tyson Long: Yeah, one more thing on the plate to deal with.
[00:01:59] Zacc Call: Yeah. Okay. So what we're going to do is we're going to go through basically, if you are this person, then you should do that thing.
[00:02:05] Zacc Call: And obviously this isn't advice. This is more like category around matching up scenario, a scenario of maybe your scenario, but it'd be more general scenario to what you should do. So if you're saving less than $10,000 a year, most of these small business retirement plans are going to be overly complex and way more than you need.
[00:02:27] Zacc Call: Okay. And frankly, they'll be frustrating and cumbersome and you should just save to a standard IRA or a Roth IRA, and then put the extra into a brokerage account. If you haven't listened to previous episodes, you can go back to the investment section. We talk about account types a bit there. And just generally, we talk about this a lot that you can put money into a regular investment account at TD Ameritrade, Schwab, Fidelity, Vanguard, you trade all these bigger, they call them discount brokers, you won't pay much in fees, you can deposit [00:03:00] money into it and buy investments and you have no restrictions on deposits and withdrawals.
[00:03:05] Zacc Call: So the reason these retirement plans exist and the reason people contribute to them is for the tax benefits. That's it. Now, we're talking about from an employer standpoint. We're talking to you, business owner. We're not talking about the employee, right? If you are an employee, the reason you do this is because you're getting free money, usually.
[00:03:25] Tyson Long: Absolutely Yeah. I do think that's an important thing. You know, as you think about these, we are trying to talk about them through the lens of the business owner. And it's okay to look at these and say, which one benefits me and my business the most, because you're the business owner, you're the one taking the most risk.
[00:03:39] Tyson Long: Some business owners really, it's important to them to make sure they take care of the employees. And that's great. But, you know, we also want to make sure we're looking at, does it make sense for you too
[00:03:49] Laura Hadley: So just to clarify, if you're wanting to or you're saving 10, 000 or less each year, it's probably easiest just to open up a regular traditional IRA or a Roth IRA.
[00:03:59] Laura Hadley: You can do that even if you're not employed by somebody. Anybody can go out and open an IRA and then invest it how you want. And the limit to what you can put in there is $6,500 each year to either the traditional or the Roth. Or a combination of the two to get to that $6,500. If you're over 50, you can add an additional $1,000 a year to each one of those.
[00:04:20] Laura Hadley: And then what you're saying, Zach, if, if you still want to save above and beyond that $6500 or $7500, if you're over 50, then that's when you would put it into a non retirement [00:04:30] account, like a brokerage account.
[00:04:31] Zacc Call: Yeah. Yeah. And if you're married, that number that we're telling you is. $10,000. If you're married, push that up to $20,000 because let's say that you are married and, oh, real quick, going back to what Laura said, anyone can open up an IRA.
[00:04:46] Zacc Call: You don't have to be employed by someone. You do need earned income. Self employment income counts. So you're good there. If you're retired, you can't be contributing to an IRA if you have no earned income. Like social security income and pension income, those don't count. So it's just earned income. But going back to what we're saying here is if you can put $6,500 each, you can put $13,000 into each of your IRAs.
[00:05:13] Zacc Call: And even if only one spouse works, you can put money into an IRA for your spouse based on your earned income. So you have $13,000 up to maybe $15,000 if you're over 50 between the two of you. There really isn't that much more. In other words, let me say that differently. Below that $20,000 imaginary line that we've drawn in the sand, it's really just a line that we in the room are saying like, hey, below this, it's really not worth the hassle of setting up a retirement plan.
[00:05:44] Zacc Call: for another $5000 worth of contributions to a retirement plan. That's the bottom line. Maybe if you're saving 20 plus as a couple, now we start to look at these other options.
[00:05:55] Tyson Long: And if you're making higher income, but just not saving as much right now, that's okay. But also [00:06:00] don't worry about whether you qualify to contribute to these.
[00:06:03] Tyson Long: Like if you're past the income thresholds and other things, cause I think in season four, you guys talked about. ways you can still contribute to those IRAs and get the advantages of some of them, even if you're over some of those income limits. So
[00:06:14] Zacc Call: yeah, as long as you don't have a 401k plan or an official, they call it a qualified plan of any type, as long as you are not participating in a qualified plan.
[00:06:23] Zacc Call: You get the full deduction for putting into an IRA. Just a standard, traditional IRA. Okay, so that's the simplest option. The quickest option has nothing to do with how many employees you have, how much money you make. If that's all you have available to you, you can put that in and be fine. Now, let's say that you're saving more than 10 as a single person or 20.
[00:06:45] Zacc Call: As a couple and you have no employees and you really want to max out like you really want to get a good tax savings Maybe you're making two three four hundred thousand dollars a year and taxes are really super painful for you right now You should be looking into a solo 401k the criteria here. That's super important is No employees beyond you and your spouse.
[00:07:09] Zacc Call: So the contribution limits go way up. Maybe, Laura, you can run through that with us again as we go through these. Maybe you could just dive into all the contribution limits.
[00:07:16] Laura Hadley: Yeah, yeah, for sure. So if you're an employee, you can put in $22, 500. If you're over 50, you get to put in an additional $7, 500. So that would be $30, 000 if you're over 50.
[00:07:28] Laura Hadley: Or 25% [00:07:30] of your compensation, whichever is higher. Correct? I'm looking for nods over here.
[00:07:35] Zacc Call: So, from a contribution standpoint, you can put in $22,500 as an employee, and you can put in an additional $7, 500 if you're over 50. They call that a catch up. That's how much you can put in as an employee. Like a lot of things as a business owner, you play two roles.
[00:07:55] Zacc Call: Sometimes you play the role of an employee. And sometimes you play the role of an employer. So the employer can put additional contributions into the Solo 401k plan. That's still you, it's just the role you're playing as an employer. So you could put in, let's say you're over 50, you can do the $22,500 plus $7,500, so you're putting in a total of $30,000 from your own payroll.
[00:08:19] Zacc Call: And then you also made more money, so as you, you as the employer, you're putting in up to 25% of your contributions. Or sorry, of your compensation there. Now there is a maximum though. So those things added together can't exceed $66,000 of income. So be aware that the line is way higher for a solo 401k. So if you have someone who is, well, if you are someone who is making quite a bit of money, You don't have any employees.
[00:08:48] Zacc Call: A solo 401k can be a really good solution for dropping up to $66,000 into a tax deferred account.
[00:08:57] Tyson Long: It can be a good reason to get your spouse a little bit [00:09:00] involved, too, to have them be considered an employee. I mean, there's different requirements and things around that, but, you know, if you can get your spouse involved, now you've got two accounts you can do that into to get additional tax savings, if needed.
[00:09:11] Tyson Long: As always, you don't want to let the tax tail wag the dog, but great plan option for sure.
[00:09:15] Zacc Call: Right. So solo 401k plans, they sound intimidating. They're simpler than you'd think. I do think it might be nice to talk to someone like a wealth advisor to answer a few questions about this. But the bottom line is
Most firms like Schwab, Fidelity, they have a standard plan already written up for you.
[00:09:34] Zacc Call: When you have a 401k plan, you're supposed to have plan documents and a bunch of other things. Solo 401k plans are way more simple than a broad company 401k plan that you're typically accustomed to
hearing about. So they have simple plan documents, you can adopt their plan, sign those documents, start making contributions to the account that you set up with the brokerage firm.
[00:09:56] Zacc Call: And there are a few more nuances to it than that, but that's the gist of what's happening there. You're adopting their plan that they've set up, and you're assuming it as your own. Those are my plan docs. I'm gonna start making contributions to it. And the contribution limits are way higher. So, who are we talking to here?
[00:10:13] Zacc Call: You're making good money. You're really stressed about saving a lot in order to get a tax deduction. Or maybe you're just really, really interested in putting a lot of Roth money away. Because this could be a Roth 401k as well. So, you have the option to really [00:10:30] max out those contributions. And you have no employees beyond you and your spouse.
[00:10:35] Zacc Call: Okay, so now let's say you are that person that wants to save quite a bit, but you also have employees. This is where it gets complicated, and this is the part I would love to overhaul because depending on how many employees you have and how you want your rules to be set up, you should be looking at three main options.
[00:10:55] Zacc Call: One would be a SEP, IRA, that's SEP as in papa. Second would be a simple IRA. That's. What Tyson said is not so simple, which is true. And then the third one would be a company 401k plan. So that's different than a
solo 401k plan. This is your typical 401k plan that most people talk about and you hear about in the news or whatever it may be.
[00:11:18] Zacc Call: So we're going to go through these three options, but they all fall underneath the category of you make good money. You want to save a good amount of money and get tax benefits for it, and you have employees. Okay, to do a quick refresh, you're starting out as a new business owner, you want to save, but you can't afford to save a lot of money.
[00:11:40] Zacc Call: You probably should use the standard IRA or Roth. Plus a brokerage savings account. Let's say you're, you're moving on to category 2.
You still don't have employees, but you want to save more. Now consider a solo 401k. I see people who are, like consultants do this a lot too. Where they, [00:12:00] they make great money, they're a consultant, they work with a lot of people, but they don't work for anyone, and they don't have anyone working for them.
[00:12:07] Zacc Call: Solo 401ks are great solutions for them. Now we have a business that's growing, you've hired people, you want to save more and get tax benefits for it. What's going on here is the government is now saying, Hey, if you are going to benefit from the rules around these tax provisions for retirement plans, you need to make sure your employees benefit as well.
[00:12:28] Zacc Call: That's why it's complicated. It's because the government is trying to ensure that the business owner doesn't get all the benefits. It's while their employees miss out. So let's talk about SEP first. This is the plan I would use if you have very few employees. And the reason for that is you can put up to
[00:12:45] Zacc Call: 25% of your own compensation into it, up to a maximum of 66, 000 as well, which is nice.
[00:12:53] Zacc Call: That's a lot of money. And it's way less complicated than setting up a company 401k. It's even less complicated than setting up the solo 401k. It's pretty simple. We shouldn't use that word in light of simple IRAs coming next, but it's pretty straightforward. Thank you, Tyson. It's pretty straightforward to do a SEP IRA.
[00:13:12] Zacc Call: The downside is if I'm the business owner and I contribute 25% of my compensation, I have to also contribute 25% of every employee's compensation. So that's a little bit of a, not a little bit, it's a big deterrent. It's, it's why we see a lot of business owners. Not choose to do a [00:13:30] SEP if they contribute 10% to theirs They have to do that to the employees accounts as well.
[00:13:34] Zacc Call: Now, what if you are a really small business? You have this lifelong admin Worker secretary or someone that's worked with you and they've basically sacrificed their whole life to work with you You know, that's the type of person That you probably really should be taking care of and they're not making insane amounts of money.
[00:13:53] Zacc Call: So contributing a portion of their wealth to a plan is really not that much and probably should be done. So there are good examples of when a SEP should be used.
[00:14:02] Laura Hadley: So the contribution to the employee doesn't have to be 25%. Just needs to be the same as what you're putting into your own plan.
[00:14:09] Tyson Long: Yeah, I think another thing too, to remember with the SEP when it says 25% of compensation, you know, as a business owner, 25 of that compensation may not be all that you're necessarily paying yourself, right?
[00:14:20] Tyson Long: Between wages and any draws, distributions you're taking from the business, whatever you want to call it. So it's something to keep in mind. And there'll be another option we talk about later on, where if our goal is to try to maximize your deferrals and your contributions to it, Maybe there's better options.
[00:14:36] Tyson Long: You can't do the solo 401k because now you have multiple employees, but you still have other options We'll get to later.
[00:14:42] Zacc Call: Yeah, and a lot of people we talked about this in a previous episode We see a lot of businesses who do an LLC taxed as an S Corp So they are pulling a smaller salary So the smaller salary is what's considered for compensation.
[00:14:58] Zacc Call: That's what Tyson's talking about [00:15:00] there Okay, so that's the downside, is you are subject to contributing to everyone's SEP IRA at the same rate. Simple IRAs are next. And simple IRAs have contribution limits of $15,500 per employee with a catch up of $3,500. If we don't say otherwise, the catch up is at 50 years old.
[00:15:20] Zacc Call: That's when you can do additional contributions. So this is the type of plan that I would use for, let's call it, an emerging small business. You know, five to a hundred employees. I mean, if you have more than 30, 40,
50 employees, you're probably going to start looking at the next option anyway. But we see simple plans with 5 to 50, maybe to 100.
[00:15:40] Zacc Call: This is less expensive than a full fledged 401k plan. And it has less reporting than a full on 401k plan. The downside here is that you are subject to mandatory employer contributions. So even if the employee is not putting money in, You still need to put in at least 2% into their plan. And then if the employee is contributing, you need to match up to 3%.
[00:16:04] Zacc Call: So they've got these rules in place so that the employer is helping the employees, also gives the employees incentive to contribute. That's maybe less flexibility than what people want. But the contribution limits are a
little bit lower, right? At $15,500. So, the nice part about Asimple is that it limits the employer's liability of paying for the employees.
[00:16:27] Zacc Call: But because of that, it also limits the upside of [00:16:30] how much you can contribute. So far, Besides the traditional IRA, this is the lowest contribution limit that we've talked about, right? With 66, 000 in the 401k, solo 401k, and then same with the SEP, 25% of compensation up to the 66, 000.
[00:16:45] Laura Hadley: And then the simple, yeah, it's the $15,500. Plus a 3% match.
[00:16:51] Zacc Call: Right. For the employee. For the employee.
[00:16:54] Zacc Call: Yeah, but if we're talking to the business owner here, I mean, I guess they're matching themselves. That's true. 3% from the employer. But they're also matching a lot of other people as well. You know what I mean? So like, that's a big expense if you're trying.
[00:17:06] Zacc Call: That's the funny thing is that let's say you have 20 employees and you're like, Ah, I'm really excited to get my extra match into my simple plan. It's like, well, you setting up a simple plan just took on thousands and thousands of dollars.
[00:17:17] Tyson Long: And your limit's a lot smaller than. The SEP or the other options we'll talk about too, you know, so it's hard to think like, when might this be useful?
[00:17:24] Tyson Long: I think fledging new company, like you said, is a good example. I remember having a client once where they had a separate business with a different retirement plan, but then had the second smaller business where they would do like day camps where they would teach kids, like, you know, how to rock climb and do different outdoor activities.
[00:17:42] Tyson Long: And so his employees were usually younger, either just graduated from high school or in college. They'd work for a summer. They might make 20 or 30 000, but having the simple was important to him because he wanted to try to teach or instill this habit of saving. And so simple IRA made sense for him in terms of wanting to offer that to his employees for [00:18:00] that second business.
[00:18:00] Tyson Long: But for himself, he's like, yeah, I just, I would never be able to put that much in there.
[00:18:05] Zacc Call: I like that.
[00:18:06] Laura Hadley: Yeah. Cause
[00:18:06] Laura Hadley: the 3% of the 20, 000 wasn't a huge company cost.
[00:18:10] Zacc Call: Okay, so now we move on to a company 401k plan. This is what Capita has, and we only have 37 employees, so it doesn't mean you have to wait until you have 100, 200 employees for a standard 401k plan to make sense.
[00:18:24] Zacc Call: However, I think part of the reason that we are comfortable with this plan is because we're in this industry, and we know how these plans work, and for me, I'm one of the trustees on the plan. For me to go through, It's not necessarily a foreign language, whereas I think it is for a lot of people. And understanding some of the rules and restrictions around it is, is something that Capita is more comfortable with.
[00:18:48] Zacc Call: So I, I'm trying to be like really open with the fact that although we went to this a little bit earlier than some of those limits, I could see why somebody might not. I could see why somebody would stick around with the SEP and simple. Because they have fewer requirements and restrictions around it. So a company 401k plan has the same contribution limits as the solo 401k, meaning the employees can still put in 22 and a half thousand dollars and employees over 50 can put in an additional 7, 500.
[00:19:18] Zacc Call: So a total of $30,000, the company can do matching and they could bolt on a, what's called a profit sharing option where they deposit additional profit sharing in there. So you definitely [00:19:30] can contribute quite a bit more. If you are looking to create the highest contribution power for your employees with the lowest cash outlay.
[00:19:41] Zacc Call: For you, a company 401k plan with a minimal match and no profit sharing and no additional contributions is probably the way to go.
[00:19:50] Tyson Long: Yeah, sweet spot for sure.
[00:19:51] Zacc Call: Yeah. So then let's talk about what I mean by all of that. Okay. So in order to ensure that employees get a fair shake and just to be fair, I think a lot of business owners are like, this is not a fair shake.
[00:20:03] Zacc Call: Like I'm having to put so much money out for employees, but let's just take the perspective that regulators have. for a brief moment and they're saying, Hey, we don't want employers to be able to drop a lot of money into a plan without helping the employees have incentive and put money in. So there's two options.
[00:20:22] Zacc Call: There's a fork in the road is how I would call it. The fork in the road for. Company 401k plans is either you choose to do a safe harbor plan or you don't and you are subject to various rules. It's testing that's done to ensure that the lower paid employees contribute and participate enough. So the safe harbor plan says if you follow all of these rules Your ship is in this safe harbor and the government can't come after you and say, Hey, your employees didn't contribute enough.
[00:20:54] Zacc Call: You didn't help your employees enough. And the idea is that the safe harbor plan has rules [00:21:00] that are beneficial enough for the employee that they're good. So a safe harbor plan typically has. It's a match of
4% when the employee contributes 5%. So an employee making $100,000 a year puts $5,000 into it and the employer, you will have to put in 4 into that plan.
[00:21:19] Zacc Call: And then that matching vests immediately. So you can't say, Oh, you have to be here for five years or more or something like that for the match to vest. The employee's money from day one. If they leave, they can roll that account anywhere they want and it's theirs. And that's one of the main, we've talked a lot about contribution limits.
[00:21:37] Zacc Call: There are a lot of rules with a safe Harbor plan, but that's the main one that people want to know, okay, how much is it going to cost me now? The additional costs of this typically you will have to hire what's called a third party administrator, a TPA, because there are. Obligatory filings and audits and things you have to do to maintain a 401k plan.
[00:21:57] Zacc Call: And this may sound intimidating to someone who has only a few employees and it should, because you should not be doing this with a few employees, right? But if you have a hundred employees. And you pay a third party administrator a couple thousand dollars a year to do the work to administer this plan.
[00:22:14] Zacc Call: It probably makes a lot of sense to do that. We just jumped the gun and did it a little bit early because we have a lot of employees who are financial advisors, who know the value of savings, and they really, really wanted to be able to save a lot more to their retirement plans [00:22:30] than, for example, what a simple plan would allow them to do.
[00:22:33] Zacc Call: So that's the bottom line. Higher contribution limits. It's good for highly paid employees who should save on their own with a little bit of match. And the downside is it has more auditing has contribution testing. If you're not in a safe Harbor plan and there's definitely more paperwork and filing and you'll have to pay for a third party administrator to help with it.
[00:22:52] Zacc Call: And this is the other part of the industry that I think is awful. Like we are managing ours in a way. That is really unique because we've slotted it with a brokerage firm. A lot of the places where you actually invest company 401k plans when you start small are very expensive, either insurance based or other mutual fund based firms where it's really, really expensive.
[00:23:17] Zacc Call: And so it's really hard. Bottom line is, if you're in this situation and you're trying to figure out... How to make this happen. Come talk to us. It's not a business line that we've set up and said, Hey, we manage 401k plans for people. We do know people who do it, but I'm always happy to tell people like, okay, here's how the sausage is made in the industry.
[00:23:35] Zacc Call: Here's what's bad and good about the industry.
[00:23:37] Tyson Long: And I think what's interesting about this segment of businesses, you're kind of in the tough middle spot where as a smaller business or a self employed or you and your spouse, like. As we talked about earlier, like there's some pretty attractive options there that are fairly straightforward, easy to wrap your head around.
[00:23:52] Tyson Long: If you're a really big employer, like a General Electric or General Motors, like having a gigantic 401k, you just got to have one. It's scaled across [00:24:00] thousands of employees. It's easy, but in this area where you've got, say 50 employees, it gets a lot harder. So definitely worth, you know, talking to us and helping go through the options a little bit.
[00:24:09] Zacc Call: Yeah, and the part that frustrates me the most is we could take SEPs, SIMPLs, and create a subset of company 401k plans, basically, and say any employer with less than 200 people, you can set up a 401k plan, and they can contribute up to $22,500, just match it like a solo 401k plan, like the
rules, make the rules exactly like a solo 401k plan, and then say the employer has an obligation.
[00:24:37] Zacc Call: To match up to 4% dollar for dollar that would get the same 4% contribution to like the the safe harbor plan, right? So we just say on the first 4% the employee contributes the employer contributes and it doesn't need plan documents These are the rules for eligibility if anybody in the firm gets it everybody in the firm gets it like standardize everything
[00:25:00] Laura Hadley: This is the campaign for Zach
[00:25:01] Zacc Call: and then right exactly
[00:25:03] Laura Hadley: Vote for Zacc 2024
[00:25:04] Tyson Long: then nobody's listening to you in terms of legal decision makers right exactly we've got thousands and thousands of listeners none of them are none of them in washington dc though
[00:25:14] Zacc Call: they're all retired hey those people actually vote so anyway the bottom line is like we could make that plan so simple and have it be adopted by firms so easily But there's just not a lot of money in it and that's why, that's [00:25:30] why it's problematic is there isn't a company out there that has a large incentive to make that happen.
[00:25:34] Zacc Call: You almost need the government to change it. And then a company to have incentive to facilitate it, but maybe someday in the meantime, that's how you work through if you have more than a few employees and you're
trying to save a lot, consider a SEP if you're under five employees or so, anywhere from two, three, four employees up to between 50 and 100, consider a simple and then anywhere from 20 employees, And up you could start looking at a 401k plan for your company really depends on How much money your employees will save like if you're saving your employees a lot of money because They're going to end up with a much better 401k plan.
[00:26:11] Zacc Call: It may make sense to do a 401k. I mean we have Employees that max out the 401k every year So we're saving them enough in taxes that the two or 3,F000 we pay to the third party administrator was worth it with way fewer employees than most firms. Okay. So besides this, I think we have to really remember and not forget how important just a straight up non retirement account is.
[00:26:38] Tyson Long: Yeah. Don't discount it. It's awesome. Great tool.
[00:26:40] Zacc Call: So, complete flexibility in investments, and a lot of people are like, well, it's not a retirement account, so I guess I can't use it for retirement, which is not the case. Like, you can use it as, in fact, we love it when someone has a joint or an individual account in retirement.
[00:26:57] Zacc Call: It allows so much tax flexibility [00:27:00] and managing tax brackets and doing a lot of really great things throughout retirement. So I think everyone who saves some money for retirement should have some money in non retirement accounts for flexibility purposes. That's just something to remember and think about.
[00:27:15] Zacc Call: So maybe you decide as a business owner, you know what? This all sounds really complicated. I'm going to make my own contribution to an IRA, and then I'm going to put 50, 000 into a brokerage portfolio every year. And I'm going to forget all this other stuff. And I'll try to help my employees encourage them to save in another way.
[00:27:32] Tyson Long: Yeah, I think everybody should, you know, whether you're a business owner or not, should consider having these non qualified brokerage and investment accounts. But even like when I've thought about if I were to run my own business, I would want that even more. So just for the flexibility it gives me as a business owner to be able to access more money if I had to, to help my business, like, you know, I can't to some degree I could borrow against a 401k, but I've got a lot more limits on that than I do having this account available to me.
[00:27:59] Laura Hadley: Cause that brokerage account, you have no contribution limits. You can put in whatever you want. Even if you didn't make money that year, you could put some in a hundred percent flexibility. You don't have to wait till 59 and a half or, you know, the different restrictions that retirement plans have. You can take it out and invest it in another part of your business or, you know, do whatever you want with it.
[00:28:17] Laura Hadley: And there is something called margin borrowing. I don't know if you want to touch on that, Zach.
[00:28:20] Zacc Call: Yeah. I mean, I'll give you an example. We have a business owner who needed 300, 000. And he needed it for cash flow with the business. Didn't have it in the business bank account. [00:28:30] Didn't want to sell any investments.
[00:28:31] Zacc Call: To your point, didn't want to raid retirement portfolios at a high tax cost. So he just borrowed against his investments. It's called margin. Paid interest for a period of about a month or two on the loan that he lent himself. So he had to pay the brokerage firm that interest, who lent him the money on his own investments.
[00:28:49] Zacc Call: So he didn't have to sell anything, his investments. fluctuated at the same rate they would have had he just done nothing. And he borrowed that 300, 000 against his investments. A couple months later, the cashflow of the business, he was able to bridge that gap, get the cash back, deposited it back to the account and everything was great.
[00:29:06] Zacc Call: And he was happy. He only had to pay a little bit of interest in the meantime for a couple of months. So it. It works really well. Oftentimes when you hear the word margin, it's people borrowing more money to buy more stocks and that gets a little bit more risky and you can end up in some trouble that way.
[00:29:23] Zacc Call: But the way he used it, it's kind of like using a home equity line of credit. And for a while, the rate on margin accounts was really, really low. And it was lower than home equity lines of credit. So we had people using their, their margin on their portfolios instead of like a HELOC.
[00:29:38] Laura Hadley: Keep in mind money that you put into these brokerage accounts, you don't get to deduct your taxes in the year that you contribute to them.
[00:29:44] Laura Hadley: So, you know, with a retirement plan like an IRA or 401k, you put money in there and you're deferring paying the taxes on it until you take it out. That's not the case with these brokerage accounts. Money that you put in. It's money you've already paid tax on. There's some strategies to save on taxes [00:30:00] inside of that account, but that is something to consider.
[00:30:02] Zacc Call: Yeah, you won't have to pay taxes on those contributions again when you take it out, but you will pay taxes on interest, dividends, and growth when you sell investments. Isn't that crazy that like all of these rules, all of these restrictions, they all surface just because people want a tax deduction for putting it in the account?
[00:30:20] Zacc Call: Or they wanna put it into a Roth status where it grows tax free. Which don't get me wrong, they're both great. Like getting a tax deduction
and tax-free growth in a Roth, great. But if it costs you so much in time and money to run the plan to get that, it just would've been better to put it in a regular brokerage account and let it be.
[00:30:39] Zacc Call: Okay. Other plans that we haven't talked much about? I find that defined benefit plans, generally, most people know these as pensions. They've gone by the wayside a bit. As bigger institutions have dropped them. It
used to be like one in four people had a pension in the 80s. And now, very, very few do. That's not necessarily what we're talking about here though.
[00:30:59] Zacc Call: That's the pension for people who work for big institutions. As a business owner, people will pitch you the idea of doing a defined benefit plan because you will be $200,000 in a year where you can get the tax deduction in that year. So it's super exciting because... Otherwise, you're staring down the barrel of paying $30,000 or 40, 000 in taxes on that $100,000 and so it sounds crazy and it sounds scary to have to pay that tax amount.
[00:31:25] Zacc Call: So, the advisors may have you put money into a defined [00:31:30] benefit plan. My problem with these, and just taking a step back, they can be useful. The only thing to understand here is You may be committing yourself to multiple years of those high contributions, or you will break the plan. And that can be really scary.
[00:31:46] Zacc Call: Maybe more scary than paying $30,000 in taxes, having to contribute $100,000 for three or four or five years. That's a big deal. And that can be a problem. Also, much more restrictive. Anytime you get a better tax benefit, you're giving up some control. So that's the defined benefit side. I don't see that many people do it.
[00:32:05] Zacc Call: This goes back to they just drop it in a non qualified account.
[00:32:07] Tyson Long: Yeah, for sure. I mean, we come across these from time to time, but like, like Zach mentioned, I mean, the, we talked about 401k plans requiring a third party administrator to do the documentation and just the record keeping. I mean, this is that maybe even times two or three just because of the.
[00:32:22] Tyson Long: Actuarial work that has to go into some of these cash balance, pension plans, or defined benefit plans, where even the investments you have to be careful with, because if you don't make enough, like Zach
mentioned, like if you don't get a certain return, you might have to make catch up payments to hit a certain target or catch up contributions.
[00:32:39] Tyson Long: If your investments do too well, that might limit your ability to even put money into it in future years when you might really need to. So it's definitely a little bit more tricky type of plan, not saying it. It can't make sense, but I definitely think it's a more limited use case than some of the other
ones we talked about before.
[00:32:55] Zacc Call: I think in general, listeners, you probably get a sense for this, but I think over time us at [00:33:00] Capita have experienced both sides of it and we tend to value flexibility probably a little bit more than we all used to 10, 15, 20 years ago in the industry. We just see the benefits of it, having watched people go through the full cycle.
[00:33:13] Tyson Long: You kind of alluded to it and I'll just come out and say it like sometimes. This can be used as a sales tactic where, Hey, you can put away $200,000 and save taxes on it right now using this great cash balance pension plan. Let's do it. And then not thinking through or having experienced it enough to like understand that that may not necessarily be the best option, but it can be presented that way to, you know, get right.
[00:33:35] Zacc Call: Okay. An employee stock ownership plan. This is different than like stock options that you get from working at a big company and employee stock ownership plan is more for like a medium and growing company that wants to create a culture of shared ownership that really wants to have that business continue beyond the life of key contributors.
[00:33:57] Zacc Call: So that idea of an ESOP is really, really nice. I see that working really well at a lot of firms. A lot of construction firms, bigger construction firms end up in ESOPs, a lot of just consultant firms and other, there's a lot of different types where you have, let's call it high performing professionals across the entire firm.
[00:34:19] Zacc Call: That can be an area where you really want to keep those high performing professionals retained and excited about the growth of the company. An employee stock ownership [00:34:30] plan can be really beneficial. We're not going to go into a lot of detail there because that's a big concept. But the general idea is you're taking the ownership of the firm and granting smaller amounts to employees over time.
[00:34:42] Zacc Call: You do a valuation every year so you know what your stock is worth and everybody gets really excited about the bump up each year. It's funny because you don't check it very often. People don't stress about the volatility of your stock price because you're only checking it once a year, which is a little bit of a lesson for looking at your stocks a little bit too frequently, right?
[00:34:59] Zacc Call: But anyway, any employee stock ownership plans can be really beneficial for incentivizing the group and something to think about for medium and growing companies. Okay, other things to consider. We've talked about real estate investing in other podcasts, private businesses. There are a lot of other areas to invest besides retirement plans.
[00:35:17] Zacc Call: But the idea today was we wanted you to understand how to think about standard traditional IRA and Roth IRA accounts, solo 401ks, a SEP, simple, and then a standard company 401k plan. And in that order, hopefully it's helpful. The idea is now, if you are feeling lost, it's probably time to talk to a wealth advisor about it.
[00:35:40] Zacc Call: And have them run through this with you, ask you the questions and then just tell you which one to do. Or if you want to do a little more research, let us know. We'd be happy to send you more things. Thanks for listening.
[00:35:51] Voiceover: This podcast is intended for informational purpose only and is not a substitute for personal [00:36:00] advice from Capita.
[00:36:01] Voiceover: This is not a recommendation, offer, or solicitation to buy or sell any security. Past performance is not Indicative or for a future results, there can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk, including the loss of money invested.
[00:36:30] Voiceover: Therefore, it should not be assumed that future performance of any. Specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further, Capita does not provide legal or Tax advice. Please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast.
[00:37:05] Voiceover: Certain of the information discussed during this podcast is based upon forward looking statements, information, and opinions, including
descriptions of anti Anticipated market changes and expectations of future activity. CAPiTA believes that such statements, [00:37:30] information, and opinions are based upon reasonable estimates and assumptions.
[00:37:37] Voiceover: However, Forward looking statements, information, and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward looking statements. Therefore, undue reliance should not be placed on such forward looking statements, information, and opinions.
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