4 Retirement Plan Options Colorado Business Owners Should Consider
Last week at an industry luncheon I learned an alarming statistic.
In Colorado, nearly one million workers do not have access to a retirement savings plan through their employer.
Fortunately, the state of Colorado took notice and then action. The number of workers without access to a retirement savings plan in Colorado is about to shrink significantly.
Beginning in 2023, any Colorado employer with five or more employees will be required by law to offer a retirement savings plan, lest they face fines from the state. More details about this program and its requirements can be found here.
Even though the state is mandating that a retirement plan be offered, they are putting the onus on the business owner to decide what type of retirement plan makes the most sense for their business, their employees and themselves.
With this important responsibility in mind, lets introduce four common retirement plan types that satisfy the new state requirements for business owners to consider.
One of the most common employer retirement plans is the 401k plan. This is a defined contribution plan that provides tons of flexibility in its design.
401k plans allow employees to make their own contributions to retirement accounts. The plan can be designed to allow the employee to choose if their contributions go in pre-tax or Roth.
Additionally, employers can choose to match employee contributions to incentivize plan participation and employee retention. As an alternative (or addition) to a match, the plans can also be designed to allow for discretionary profit sharing.
There are costs associated with implementing a 401k plan, but fortunately the passing of recent Federal legislation provides tax credits for starting up a 401k plan that significantly reduces the cost of starting a plan.
Smaller businesses and self-employed individuals may want to consider a SEP IRA.
These plans are simple and low cost to establish. Unlike a 401k plan that allows for employee contributions, all contributions to SEP IRAs are made by the employer.
SEP IRA’s potentially allow higher annual contributions than a 401k, depending on compensation.
They can also provide a wider range of investment options in comparison to the typically limited mutual fund lineup that comes with a 401k.
While contributions currently go in pre-tax, there is the potential for allowing Roth contributions in the future from recently passed legislation.
The SIMPLE IRA is almost a hybrid of the 401k and SEP IRA plans. A SIMPLE IRA allows for both employee and employer contributions.
However, there is limited flexibility around the contributions and the maximum annual contribution amount is lower than that of both the SEP IRA and 401k.
Similar to the SEP IRA, these plans are low cost to implement and allow for greater flexibility in potential investment options than 401k plans.
State Offered Payroll Deduction Plan
The state of Colorado is also introducing a payroll deduction IRA plan for business owners to consider.
The contributions to this plan go in on a Roth basis. The same contribution limits and income phaseouts that apply to Roth IRAs apply to these accounts. These limitations are likely to reduce who can participate. They also significantly limit how much an employee or business owner can save towards their retirement.
While low cost, the investment options available in the state run plan fall well short of even what is commonly available in most 401k plans.
You Aren’t Alone
There is a lot to consider when deciding what retirement plan is best for your business. Even the points highlighted above only scratch the surface on each of these plans.
We have already been having numerous conversations with business owners to start the year about the new state legislation, what their options are and what works best for them.
If you have questions, or want to learn more about your options, we welcome a conversation.