Monday, November 21, 2016

Vanguard Small Business Plans: Are They Right for Your (and Your Employees’) Retirement Needs?

If you’re a small business owner researching the different retirement plans available for your company, you might be a little discouraged by what’s on the table.

When it comes down to it, low-cost and easy-to-manage retirement plans for small businesses are few and far between. Lots of small businesses in the U.S. don’t offer employees 401(k) retirement plans because administering them can be too high-maintenance for a busy small business owner. And with steep account service fees, small businesses often pay more for solid retirement plans than large companies do.

But in a landscape of pretty grim retirement investment options, here’s your one beacon of light: Vanguard Small Business plans.

That’s right—Vanguard has opened their doors to small businesses. And this investment management powerhouse might have the low-cost, hassle-free retirement plan that your small business needs.

Why Use Vanguard Small Business?

When we say “Vanguard Small Business,” we aren’t just talking about one type of small business plan. There are a few for you to consider—4 retirement plans, in fact.

We’ll dive deep into the details of each Vanguard Small Business plan available.

But first, why use Vanguard Small Business in general?

Well, Vanguard is one of the more respected names in the investment community. They consistently deliver great results on their investment portfolio, so you can be confident that your money is in good hands.

Finally—and perhaps most importantly—Vanguard Small Business wins out on costs. The costs to offering retirement plan for small businesses aren’t insignificant. But Vanguard’s fund expense ratio—or the total percentage of funds going toward administrative and management fees—is 82% less than the industry average. Instead of an industry average 1.01% expense ratio, Vanguard Small Business plans have an expense ratio of 0.18%. Also, none of the 4 plans has industry-standard setup fees.

So, if you’re a small business owner who wants to offer your employees great retirement benefits but you just don’t want to deal with the cost or hassle, Vanguard Small Business might be for you.

Now, are any of the 4 Vanguard Small Business plans right for your small business? Read on to find out.

Vanguard Small Business: The Retirement Plans You Need to Know

There is no “one type” of small business. As you well know, small businesses come in all shapes and sizes and have many different needs.

That’s why you’ll see a few different Vanguard Small Business plans to choose from based on the kind of small business you run. One Vanguard Small Business plan is a better fit for sole proprietorships, and another is a better match for a larger-sized small business.

Whatever the kind and size of small business you run, you’ll find a Vanguard Small Business plan for you. Let’s go through the ins-and-outs of them all to see if you can find a perfect match.

Vanguard Small Business: Individual 401(k)

With the Vanguard Small Business Individual 401(k) plan, the name says it all.

This Vanguard Small Business plan is for companies on the smaller end of the spectrum: Vanguard specifically designates this plan for sole proprietorships and partnerships with no common law employees.

What’s a common law employeeGood question. A common law employee is any employee who’s not an employer, partner, shareholder of the corporation, or a respective spouse.

Could you qualify for this Vanguard Small Business plan? Here’s what you need to know.

Employer & Employee Contributions

If you opt for the Individual 401(k) Vanguard Small Business plan as an employer, here’s what Vanguard Small Business sets as your contribution regulations:

As an employer, you can contribute a maximum of $53,000 per eligible employee, for the 2016 tax year. The amount that’s deductible on your taxes as an employer contribution, though, is 25% of the given compensation. Your employer contribution is considered a business expense on your tax deductions each year.

If you’re an employee, you can contribute to your retirement plan with either pre-tax or Roth contributions.  

Now, let’s take a step back. What’s a pre-tax or a Roth contribution?

Pre-Tax Contribution

A traditional 401(k) has contributions that are made on a pre-tax basis. Put simply, an employer takes money out of their employees’ paychecks and transfers it in the employee’s retirement plan before withholding regular taxes.

When employees begin to tap into the retirement plan and take distributions, they’ll pay normal income tax on those distributions. The income tax that’s charged is based on the employee’s tax bracket at the time of the distribution.

Roth Contribution

Whereas a traditional 401(k) has pre-tax contributions, a Roth 401(k) has post-tax contributions. This means that the contributions are made after an employer withholds taxes.

And because employees in this case have already paid taxes, they won’t need to pay taxes on any amount they pull from their Roth 401(k) later on.

But here’s one caveat: If the employee’s company matches the employee’s Roth contribution, the company match is a pre-tax contribution. So any funds in the employee’s retirement plan that result and grow from company matches will be subject to regular income tax when the employee draws from the fund.

The difference between a pre-tax and Roth contribution can be complicated, but here’s really what you need to know:

With a traditional 401(k), income taxes are charged on distributions from the fund. With a Roth 401(k), income taxes are charged on the contributions to the fund.

Now, let’s get back to the matter at hand: Vanguard Small Business and the Individual 401(k).

If you’re an employee, you can contribute with either pre-tax or Roth employee deferral contributions to this Vanguard Small Business plan. Vanguard sets a contribution limit up to $18,000 for the 2016 tax year, and $24,000 for employees age 50 or older. Those contributions can’t exceed the full amount of the employee’s compensation.

Total Contributions

So you have this Vanguard Small Business plan’s set employer and employee contribution guidelines.

But Vanguard sets a cap at the total contribution to the retirement fund. The combined amount of employer plus employee contributions can’t be more than $53,000 for the 2016 tax year, and $59,000 for employees age 50 or older.

Account Fees

As you can imagine, Vanguard Small Business doesn’t offer these fund accounts for free. Vanguard—and other retirement fund providers—charge service fees.

The fee on an Individual 401(k) isn’t too steep: It’s $20 per year for each Vanguard Small Business fund held in an Individual 401(k) account.

Vanguard also offers different account services called the Flagship, Flagship Select, Voyager, or Voyager Select services. If you invest $1 million to $5 million in a Vanguard Small Business fund, you’ll qualify for one of these select services. And if that’s the case, the $20 yearly account fee is waived for all participating accounts in the plan.

The fee waiver is a great perk for business owners who qualify, but of course, you’ll have to contribute a fair amount to your retirement plan to be eligible.

Why Go with This Vanguard Small Business Plan

You know the fast facts on the Vanguard Small Business Individual 401(k) plan.

Why would you sign on the dotted line and go for this plan?

Well, as we mentioned, it’s the Vanguard Small Business plan for sole proprietors or partners. Also, using this plan is a great way to maximize your yearly tax deductions. Business owners can contribute as either employers or employees. But if you go the employer-route, you can deduct a contribution of up to 25% of your compensation on your taxes.

And finally, Vanguard Small Business is one of the only investment companies that offers a Roth 401(k) option—making this plan a flexible option for business owners. You’ll have the choice of when you pay income taxes on your contribution or distribution to your retirement fund.

Vanguard Small Business: Small Plan 401(k)

Next up, Vanguard Small Business offers the Small Plan 401(k)—or what’s called the Vanguard Retirement Plan Access.

This Vanguard Small Business plan was crafted with the new or very small businesses in mind. The plan makes it much easier for new small businesses to offer the same kind of retirement benefits that larger companies offer with a typical 401(k).

And to be eligible for this low-cost, full-service Vanguard Small Business plan, you just need to have more than one employee.

If you opt for the Small Plan 401(k), here’s what to expect.

Employer & Employee Contributions

If you’re set up with this Vanguard Small Business plan, your employees can decide how much they’d like taken out of their salary and contributed to their 401(k) on a pre-tax basis. And on the employer side, you can make additional contributions to your employee’s 401(k) based on matching contributions set by your plan agreement.

The most that a business’s employer and employees can contribute to accounts under this plan is 100% of the employee’s compensation—set at a combined maximum of $53,000 for the 2016 tax year, and $59,000 for employees ages 50 and older. The employer can also deduct these contributions on their taxes, but the maximum tax-deductible employer contribution is 25% of the employee’s compensation.

The employee, on the other hand, can elect to contribute up to $18,000 to their plan for the 2016 tax year, and $24,00 for employees ages 50 and older. Vanguard won’t accept contributions that are more than 100% of the employee’s contribution.

Account Fees

In the past, small business owners have been hesitant to offer full-serviced retirement plans for their employees because the administrative fees are so steep.

But with this Vanguard Small Business plan, Vanguard wants to provide the lowest-cost investment solution for small businesses. Vanguard is especially upfront with any fee associated with the Vanguard Retirement Plan Access, and they’re always trying to cut costs for small business owners.

All 401(k) plans require administration fees. Managing investment accounts of course take some work. But because the accounts under the Vanguard Retirement Plan Access are smaller accounts, the administrative fees are lower—makes sense.

This Vanguard Small Business product charges a per-participant record keeping fee. Unlike most mid-sized 401(k) plans, this fee won’t climb as your assets grow. Plus, you can set up a record-keeping fee credit to cover the costs.

Why Go with This Vanguard Small Business Plan

This Vanguard Small Business plan is for the small business owner who wants to have a retirement plan in place for their employees, but doesn’t have the time to manage one. The Small Plan 401(k) is a simple, solid plan that you won’t have to spend hours managing.

Plus, you still have access to Vanguard’s professional plan management, a wide array of investment options, and a customizable product that lets you set the terms of your plan.

And finally, the costs associated with retirement plans are confusing—there’s no doubt about it. But to keep you out of the dark and aware of how much you’re paying for your Vanguard Small Business plan, Vanguard will send you a detailed expense report to track what’s coming out of your wallet, making it an especially transparent and easy-to-understand product.

Vanguard Small Business: SEP-IRA

Next up on the list of Vanguard Small Business plans is the SEP-IRA.

All right…what do these abbreviations actually stand for?

Well, let’s start with an IRA: An IRA stands for individual retirement account. Put simply, an IRA is a type of retirement account that lets you stow away cash in a savings account with a fair amount of tax breaks. Whereas a 401(k) is set up by your employer, the most common types of IRAs are accounts that you open for yourself.

But in the case of this Vanguard Small Business plan, these IRAs are opened by self-employed individuals and small business owners. That’s where the “SEP” part comes in: SEP stands for simplified employee pension.

Putting these two abbreviations together, you get the basics of how Vanguard Small Business’s SEP-IRA works. This retirement account is for self-employed business owners. Or business owners with a few employees can use the SEP-IRA for their own account and contribute to their employees’ personal IRAs to encourage retirement savings.

Let’s walk through just how these contributions work.

Employer & Employee Contributions

If you use the SEP-IRA from Vanguard Small Business, the employer will be the one making contributions to the accounts. The employees, on the other hand, can choose to contribute to their own personal IRA accounts.

Employers can contribute up to 25% of compensation or a maximum of $53,000 for the 2016 tax year—whichever amount is less.

And if your employees choose to contribute to their personal account, they can contribute up to $5,500 for the 2016 tax year (or $6,500 for employees age 50 and older). This is the total amount an employee can contribute personally to a SEP-IRA account.

Account Fees

The fees on this Vanguard Small Business plan aren’t all that different than what you’ll get on the Individual 401(k).

As the owner of your business, you’ll pay $20 per year for each Vanguard fund you have as a SEP-IRA with a balance less than $10,000.

Also, if you qualify as Flagship, Voyager, or Voyager Select Services client—meaning you invest anywhere from $1 million to $5 million with Vanguard—the service fee is waived.

Why Go with This Vanguard Small Business Plan

The SEP-IRA plan from Vanguard Small Business is a great option for small business owners with only a few employees or those who consider themselves self-employed.

And if you’re planning on keeping your business a one-person show, then using the SEP-IRA might be your best bet. You’ll pay low account fees and your contribution limit is based on a pretty simple formula—you can put away as much as 25% of your income, up to a cap set each year.

So, if you’re looking for simplicity, an SEP-IRA is a smart choice. Signing up for a SEP-IRA from Vanguard Small Business is an easy process with minimal paperwork required—making this retirement plan a convenient option for busy small business owners.

Vanguard Small Business: SIMPLE IRA

Last on the list of Vanguard Small Business plans is the SIMPLE IRA.

The “SIMPLE” part stands for Savings Incentive Match Plan for Employees. You already know the “IRA” part—individual retirement account.

A SIMPLE IRA is just another type of traditional IRA, where your contributions are made tax deductible and your investments grow tax deferred until you’re ready to take from the investment fund.

So, if you’re a small business owner with 100 or fewer employees, this Vanguard Small Business plan might be for you. Here’s what you need to know about this retirement plan.

Employer & Employee Contributions

With the SIMPLE IRA, Vanguard Small Business requires that employers match employee contributions.

As the employer, you have two options for contributions. One option is to match up to 3% of each eligible employee’s salary, as long as that amount doesn’t exceed $12,500 for the 2016 tax year. The other option is to contribute 2% of each eligible employee’s salary, as long as the amount doesn’t exceed $5,300 in the 2016 tax year. The option the employer chooses just depends on how much they’re willing to contribute to their employees’ funds.

On the employee’s side, Vanguard Small Business allows contributions of up to $12,500 for the 2016 tax year, or $15,500 for employees 50 years of age or older. But as an employee, you’re not required to contribute to your IRA in any given year.

Account Fees

A SIMPLE IRA from Vanguard Small Business comes with a slightly steeper account service fee at $25 per year for each fund.

Again, this fee will be waived if you’re a Voyager, Voyager Select, Flagship, or Flagship Select client—which you very well could qualify for if you run a small business with a fair amount of employees contributing to their IRAs.

Why Go with This Vanguard Small Business Plan

This Vanguard Small Business Plan is a great option for small business owners who want a straightforward retirement plan.

And if you’re willing to match your employees’ contributions, you’ll encourage your workers to contribute to their own retirement plans.

Also, SIMPLE IRAs have higher contribution limits than other IRAs, so you and your employees save more money in the long run if you make maximum contributions.

How to Choose Your Vanguard Small Business Plan

Now that you have each Vanguard Small Business plan laid out in front of you, do you know which retirement plan is right for you?

We’re the first to admit it: Choosing a retirement plan for your business is tough work. You’ve got a lot of things to consider.

You’ll need to look closely at the structure of your business, your employees’ needs, and how you want your retirement savings to grow. Once you get a handle on your priorities for your retirement savings, you’re well on your way to choosing the right plan for your small business.

Good luck!

The post Vanguard Small Business Plans: Are They Right for Your (and Your Employees’) Retirement Needs? appeared first on Fundera Ledger.

from Fundera Ledger

No comments:

Post a Comment