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Prepared by Resonant Financial Management for NAEA Members

This tax season, are you looking for ways to maximize tax savings for yourself and your clients?

Maximize Income Tax Savings with Retirement Plans for Self-Employed Persons and Small Business Owners: A Non-Technical Overview

This resource offers a non-technical overview for a variety of retirement plans specifically for self-employed persons and small business owners. It covers Simple IRAs, 401(k) Plans (Traditional, Individual, and Exchange), and SEP IRAs. Towards the end, it focuses on the relatively new concept of a 401(k) Exchange.

The content includes:
- Case studies for each plan type
- Definitions and/or overviews of retirement plan types

- Insights around the facts of each retirement plan

>>> Do you have questions about a retirement plan you or your client are considering? Reach our Advanced Planning Team today for direct, personal, and complimentary Q and A sessions. We'll work with you until you're completely satisfied. Call or email Wade Zancan at 443-546-2561 or

Case Study 1
A senior surgeon is a 1099 employee of a health system. He makes more than $500,000 a year and does not have any employees. He wants to minimize his taxable income. He’s married and has no children.

The surgeon chose a SEP. In 2022, he’s able to put the maximum $61,000 of pre-tax income into his retirement plan. If his pay was significantly less, it would be good practice to evaluate the use of an individual 401(k) versus a SEP on a yearly basis. Because of the structure of the 401(k), participants may be able to defer higher amounts at lower incomes.

Note: The plan could be combined with a Defined Benefit Plan, such as a cash balance plan, to maximize yearly contributions, but this is outside of the scope of this blog. We will explore these plans at a later date.

SEP Definition
A SEP (Simplified Employee Pension) Plan allows for employers to make employer contributions to the SEP for the benefit of the business owner and any employees.

SEP Overview
- Easy to set up and administer
- Flexible (meaning the percent contribution may change on a yearly basis)

- Costly if there are many employees and all employees get the same percent contribution
- Require investment management by each employee, which can pose challenges for inexperienced investors

SEP Facts
- Rollovers: Eligible for rollovers after separation from employment

- No Roth: Pretax contributions only
- No Platform for Education: Unlike recordkeeper platforms, it’s difficult to provide education communication across the board
- No Loans or Hardships: Participants have no access to money in an emergency except through withdrawal, which may be subject to tax and penalties
- Contribution Limits: $61,000 or 25% of income - whichever is less. ALL EMPLOYER CONTRIBUTION

Case Study 2
Two dentists own a small and moderately successful dental practice. All other eight employees have been working with the practice for several years or longer. The owners think it’s important for their employees to save for retirement. They have had this plan for many years. They don’t receive complaints about the plan and have not reviewed the plan in several years.

Their plan is a SIMPLE IRA. Employees are allowed to contribute up to $14,000 in 2022, plus a $3,000 catch-up if they’re older than 50 years. The non-elective match for the employer can be up to $6,100.

SIMPLE IRA Definition
A SIMPLE IRA Plan (Savings Incentive Match Plan for Employees Individual Retirement Account) allows employees and employers to contribute to traditional IRAs set up for employees.

- Easy to set up and administer
- Cost efficient

- Similar to SEPs, each employee must manage their own investments, which can be challenging for inexperienced investors 

Two-Year Rule: Not eligible for rollover during this time. Penalty of 25% on withdrawals in the first two years of a SIMPLE IRA
No Roth: Pretax contributions only
Stand Alone: Employers can’t have any other plan set up, limiting options to save for retirement. 
No Platform for Education: Unlike recordkeeper platforms, it’s difficult to provide education communication
No Loans: No loans
Contribution Limits: $14,000 with $3,000 catch up 
Committed to a Match: 100% match up to 3% of contributions or provide 2% non-elective match
No Vesting Schedule: All employees are 100% vested
Limited Availability: Plan can’t go over 100 employees or it’s not compliant 
Greater Admin Burden: Individual account paperwork. Significant time constraints to meet with each employee for the financial advisor
No Profit Sharing: No option for profit sharing limits employer contributions and employee savings

NOTE: It would be good practice to compare all SIMPLE IRAs to a 401(k) Exchange plan. The Exchange could potentially offer greater tax savings to owners and employees with a plan cost that may be comparable. See 401(k) Exchange information below.

Case Study 3
A successful local plumbing firm has two owners and fifty other employees. They have been in business for over a decade and are growing rapidly. The owners want to put money away for themselves but also provide for their employees. Avoiding current taxes is very important to the owners.

The plumbing company has a 401(k) with a 3% Safe Harbor non-elective match. They use “New Comparability” contributions to maximize owner profit sharing contributions. In 2022, the owners can defer up to $67,500 if they are older than 50.

401(k) Plans (Single Employer and Group Plans) Definition:
A 401(k) is a retirement plan that allows employees to divert a portion of their income into their accounts. The employer may also elect to contribute a matching contribution or profit sharing. Accounts are held with a recordkeeper (Like a Fidelity or Transamerica).

401(k) Facts
Flexibility at Plan Level: The plan can be customized to meet needs of employer
Flexibility with Match and Profit Sharing
Start-up Tax Credits: Up to $5,000
Great Platform for Education
High Contribution Limits: Both before and after tax
Flexibility with Fiduciary Support: The plan sponsor may wish to hire experts to support the Fiduciary duties
Flexible Vesting Schedule: The match and profit sharing may have individually tailored vesting schedules
No Limit to Size of Plan
Can be Used Alongside Other Plans: In order to maximize contributions, the 401(k) may be combined with Defined Benefit Plans
Allows for Hardships: Participants may have access to funds with loans or hardship withdrawals
May be More Expensive for the Administration of the Plan: Can, however, be most efficient overall when taking into consideration employer match
Investment Options: Access to broader investment arrangements
Withdrawal Restrictions: Participants under 59 ½ years cannot take a withdrawal without a triggering event
Vesting Schedule: Employers can incentivize employment by creating individualized vesting schedules for non-Safe Harbor matches 
Profit Sharing: Option to add profit sharing and or a Defined Benefit Plan
Higher Contributions: Higher contribution limits including Roth and profit sharing - $61,000 in 2022, $67,500 for those 50+

Case Study 3 Revisited!
A successful local plumbing firm has two owners and fifty other employees. They have been in business for over a decade and are growing rapidly. The owners want to put away for themselves but also provide for their employees. Avoiding current taxes is very important to the owners.

During a plan review, it was discovered that the HR manager was taking a lot of personal risk with the plan administration, which made them uncomfortable. It was also determined that plan expenses and investments were not being reviewed regularly.

The company transitioned to a 401(k) exchange. With the exchange, they were able to keep their plan document, reduce the administrative burden, and make their HR manager happy.

The exchange allowed them to shift the responsibility of managing their investment choices to the Investment Fiduciary provided by the Exchange, thus further reducing the company’s risk.

While the cost of the plan was not a top priority, they were able to secure a competitively-priced program.

When a 401(k) Exchange Makes Sense
- Free up time spent on administering retirement plans

- - Almost all administration, including answering day-to-day questions, is offloaded [provided by 3(16)]
- Minimize administrative fiduciary responsibilities
- - Owner may not have to sign 5500 [provided by 3(16)]
- Minimize investment oversight risk
- - Fiduciary investment support provided by [3(38)]  
- Potentially lower costs due to economies of scale from pooled assets
- Gain easier exit strategies compared to a traditional MEP

The Exchange Represents a More Modern Take on Multiple Employer Plans (MEPs). What are some Features of Traditional MEPs)
- Covers employees of more than one employer under one single plan document
- Sponsored by one entity: an association, Professional Employment Organization, or other professional organization
- Other employers are permitted to adopt into the plan
- Sponsor (organization – like a Chamber of Commerce) is responsible for selecting the overall plan design determining the options for adopting employers
- Some are very restrictive; others are more flexible
- Sponsor will decide whether (or not) to contract with organizations who may provide services to the plan (such as an administrative fiduciary, TPA, or investment fiduciary)
- Plans may be somewhat expensive

Under many circumstances, the 401(k) Exchange provides a robust solution for many situations. 

Regardless of which plan is employed, it’s imperative that all retirement plans are reviewed on a regular basis to make sure that they remain competitive, and compliant. Plus, the plan must continue to effectively serve the employee and employer.

Securities and Advisory Services Offered Through Cetera Advisor Networks LLC, Member FINRA / SIPC, a broker/dealer and Registered Investment Advisor. Cetera is under Separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Networks LLC nor any of its representatives may give legal or tax advice.

Does your practice offer a 401(k) plan? Or would you like to create one this year? Reach us today to schedule a complimentary "health check" of your existing plan or consultation for a new plan.

Through a series of questions, we'll explore potential ways to tune up your current plan or how a 401(k) exchange could support the needs of your practice.

The 401(k) exchange - provided by Transamerica and other supporting groups - offers practice owners value through administrative offload, simplified payroll contribution processing, loan and distribution support, time savings, fiduciary risk management, and more. Click here to learn more about what a 401(k) exchange offers.

ADDITIONAL OFFER FOR NAEA MEMBERS: Save 15% on plan advisory services offered by Resonant Financial Management

Contact one of our team members:
Wade Zancan: 443-546-2561 |
George Hunter: 443-546-2560 |