Here we are in the home stretch. In Part 1 and Part 2, we talked about what CalSavers is, what it isn’t, what it is trying to fix, what it gets right, and what it gets wrong. We’ve covered a lot in two short weeks, and now is the time to discuss just what this law means to your business, how to determine if this program is right for you, and how to take action to protect your business and your employees from the coming retirement crisis.
First, let’s talk about a time when using CalSavers might make sense to a business. If you, as the business owner, are not very concerned with building retirement assets for yourself outside of the business, and are not looking for deferring income and profits from taxation, then CalSavers may be your best bet. I have talked to many business owners that I refer to as “serial entrepreneurs”. These business owners take a business from the ground up and then use the proceeds to build another business, and another, and so on. These owners look at retirement savings in a completely different way. Capital growth to them is through building and selling businesses. It is not built through steady retirement savings. There is absolutely nothing wrong with this approach as we are all built and operate differently. Since the owner tends to sink their assets and capital into new ventures, an IRA, SIMPLE, 401k, etc. is not a top priority. It is for this type of owner that CalSavers may be the best option. This owner could defer his employee’s funds to their IRA’s administered through CalSavers, while they opt-out of the program and continue to build businesses. There is still a case to be made for this owner starting a company sponsored retirement plan away from CalSavers, but it can be a tougher case to make.
Now, for most business owners that I know, tax deferral, profit deferral, income deferral, smart use of qualified business expenses and tax credits, as well as using legal tax reduction strategies are preferable, and in many cases necessary. In these types of cases CalSavers might not be the best way to assist the business. I say that since, within CalSavers, there is literally no benefit to the employer in the form of legal ways to defer revenues and, by extension, taxes. Most business owners that I know would love to be able to defer as much of their business’ revenue as legally possible or allowable. There are a seemingly infinite number of ways to accomplish this, but one of the best ways to do just that is to fund a qualified retirement plan for you and your employees, provide a possible matching contribution, and maybe even allow for a profit sharing bonus in the form of a discretionary profit sharing contribution. These qualified retirement plans include SIMPLE IRAs, SEP IRAs, 401k’s, or any number of other types of plans. All of these types of plans would qualify for a CalSavers exemption. The trick is to know which of these retirement plan types are the best fit for your business. A quick call to Moneywise could point you in the most beneficial direction. If the plan is built and administered correctly, a company sponsored retirement plan could check all of these boxes and provide the owner of the business with a much better tax situation.
In addition to the tax benefits to the business, an equal tax benefit is there for your employees. They would get to defer their income, and in certain cases, make their own decisions on when to pay the taxes on this income. Flexibility is key in retirement planning and by giving your employees a choice between a traditional tax treatment versus a ROTH tax treatment provides for that level of flexibility. Additionally, your employees would have the choice of whether to contribute to the plan or not, similar to CalSavers, but the difference lies in just how much they would like to defer. In 2019, the maximum amount a person could defer into a 401k is $19,000 ($26,000 if over the age of 50) per year. For CalSavers, that maximum is $6,000 per year ($7,000 if over the age of 50). As an owner, you have that choice as well, and can build an asset that is not tied to the business for an added layer of diversification. Again, if the plan is properly built with the owner’s goals in mind, and takes certain employee protections into regard, a 401k plan can be the flexible vehicle with which your company can reduce taxes, provide a benefit to all employees (owners and rank-and-file alike), attract and retain great employees, reduce taxes, build assets outside of the business, reduce taxes, and provide a place to defer profits for the business. Did I mention that a 401k can help reduce taxes? Ya, it does that as well.
In some small way, by implementing a cohesive strategy built around corporate goals and objectives, a well-built and administered retirement plan can solve the coming retirement crisis. The interests of the employee and the owner do not have to be in conflict. By tying company goals, objectives, and profit metrics to the retirement plan, everyone’s interests can be protected. The company benefits. The owners benefit. The rank and file employees benefit. Society as a whole benefits. By providing a more secure retirement for yourself and your employees, everyone benefits. In Part 4, coming next week, we will provide a couple of examples to compare and contrast the CalSavers program versus a traditional 401k offering and show how each plan works in different situations.
Companies throughout Bakersfield and Kern County have come to trust Moneywise with building and advising on their qualified retirement plans. Moneywise has built a reputation of being an open and trusted source for retirement planning for almost 20 years and would love the opportunity to earn your business. If you would like an honest assessment of whether CalSavers is right for you, or if a private retirement plan is in your company’s best interests, please contact us for a no-nonsense, no-obligation consultation.
Moneywise Wealth Management (661) 847-1000 or firstname.lastname@example.org.
*Disclosure* The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.