Find Safe Harbor

July 15, 2008

Source: Nielsen Small Business Resource Center


Small business owners can save for retirement while enjoying maximum tax benefits courtesy of the safe harbor 401(k) plan. Do you have one?

By: MATT ALDERTON

A diverse group, to be sure, small business owners nonetheless share many common concerns. They worry about health care, for instance. They're confused about the tax code. They struggle to stay current amid changing tools and technology. And almost across the board, without the pensions and benefits of larger corporate cultures, they worry and wonder, "Is there life after business?"

According to self-described independent investment advocate Jeff Harris, author of Retire Rich and Happy: 12 Secrets to Retirement Success, there most definitely is. The key is careful and calculated retirement planning.

Still, in a world that's full of IRAs, 401(k)s and more, choosing an effective retirement plan is a daunting task. After all, each of several options comes pre-packaged with administrative fees, contribution limits and hard-to-decipher tax implications. So, what to choose?

The best option for small business owners, says Harris, is the safe harbor 401(k) plan. Curious, the ProNet Small Business Resource Center recently spoke with him to find out what's so urgent about retirement planning for entrepreneurs, and what's so special about so-called "safe harbor" plans.

Small Business Resource Center: What's the state of retirement planning among small business owners? Are entrepreneurs saving enough?

Harris: There is a definite mixed bag when it comes to retirement plans for small business owners. The reason I say that is there seems to be two schools of thought out there. The first is business owners who figure that they don't really have to put too much money aside in a retirement plan, because the business is their retirement plan.

The second group is the group that really understands the importance of the retirement plan. They max it out; they put everything they can into the retirement plan because they recognize that things beyond their control can occur and their business may not be worth as much as they would like it to be when they choose to retire. This second group recognizes the value and is also looking for tax advantages; they're saving because they want to reduce their taxable income.

SBRC: Why is a safe harbor plan a good option for the latter group?

Harris: If you're looking to maximize your benefit as an employer—your tax deduction—then you want a plan that will allow you to take full advantage of that. And that's currently the safe harbor 401(k) plan. With small business owners, it's very popular because it allows the business owner to set aside the maximum amount for deductions, provided they make modest contributions to their employees' plans.

SBRC: Ok, so how does a safe harbor plan work? What separates it from a regular ole 401(k) plan?

Harris: The difference is that a traditional 401(k) plan requires the employees to participate to a certain level. They've got to put money into their plans in order for the employer to get the full benefit.

So let's say I'm running a series of dry cleaners. I've got 25 employees, but only a third of them choose to put money into that plan. Well, there's a formula that limits the amount of the deduction for me as an employer. The safe harbor 401(k) says, "OK, Mr. Employer. If you're willing to match a certain percentage—4 percent, 5 percent or 6 percent of the employee's pay—of employees' pay, and you'll put money into a plan for your employees, then you can take the full deduction yourself. It doesn't matter how many employees participate. As long as you're putting some money in there you get the full benefit. That's why it's called a safe harbor.

SBRC: How does one shop for one of these plans?

Harris: There is a huge difference in the way these plans are administered and priced. So what you don't want to do is say, "Oh, that sounds like me so I'm going to go out and get a 401(k) safe harbor plan," then call up your good buddy who you play golf with who's a broker and say, "This is what I want to get." If you do that, you wind up with a very expensive, very pricey plan.

What you want to do is get at least three quotes. I say that because there are significant pricing differences between the providers of these plans. Normally, the most expensive plans are through insurance companies. Insurance companies do have these plans, but they charge a lot of fees and expenses that you normally do not have if you go with a provider, say, of mutual funds.

SBRC: Are 401(k) plans—of any sort—really the best option for small employers? Don't they come with high administrative price tags?

Harris: It is more expensive to administer a 401(k) plan because you've got to comply with all sorts of government regulations. That's an issue, but the tax advantages trump that.

Now, here's a secret: There's an outfit out there that administers 401(k) plans, and they're very affordable. They're called PAI and they provide all of the reporting for businesses; very few people know about them because they're so inexpensive, but they're an excellent resource.

SBRC: Still, let's say that I can't afford the administrative costs of a 401(k) plan—safe harbor or otherwise. What's my next best option?

Harris: There's something called the SIMPLE IRA. The reason that it's called SIMPLE is because the intent was to provide a plan that small businesses could contribute to that didn't require as much government reporting. And it does that; to a large degree, the SIMPLE IRA has been successful and a lot of small businesses use them.

The drawback is that the SIMPLE IRA does not allow as large a contribution; so you can't deduct as much off of your taxes as with a 401(k).

SBRC: How do the contribution limits of a SIMPLE IRA compare with those of a 401(k)?

Harris: Both allow you to put money aside. The SIMPLE IRA will allow you to put in $10,500 and deduct it; the 401(k) is $15,500. So, you can put more aside in the 401(k) plan compared to the SIMPLE plan.

SBRC: Let's set plan choice aside. Why is it important for small business owners to save for retirement—regardless of their vehicle for doing so?

Harris: It's all about you. If you want to have the resources to do the things you want to do when you want to do them, then a retirement plan is the vehicle that can enable you to get there.

SBRC: And finally, what's the best strategy when it comes to putting money away into your account, whether it's a 401(k), an IRA or a shoebox in your closet?

Harris: The key is: Invest in your retirement plan until it hurts. You know you're putting enough away when you're having to sacrifice a little bit for something else. This is money that will give you financial freedom and it's worth stretching.

This article is for information purposes only and is not intended as retirement advice. For more information about retirement planning, consult your financial planner.

Find Safe Harbor

July 15, 2008


Source: Nielsen Small Business Resource Center

Small business owners can save for retirement while enjoying maximum tax benefits courtesy of the safe harbor 401(k) plan. Do you have one?

By: MATT ALDERTON

A diverse group, to be sure, small business owners nonetheless share many common concerns. They worry about health care, for instance. They're confused about the tax code. They struggle to stay current amid changing tools and technology. And almost across the board, without the pensions and benefits of larger corporate cultures, they worry and wonder, "Is there life after business?"

According to self-described independent investment advocate Jeff Harris, author of Retire Rich and Happy: 12 Secrets to Retirement Success, there most definitely is. The key is careful and calculated retirement planning.

Still, in a world that's full of IRAs, 401(k)s and more, choosing an effective retirement plan is a daunting task. After all, each of several options comes pre-packaged with administrative fees, contribution limits and hard-to-decipher tax implications. So, what to choose?

The best option for small business owners, says Harris, is the safe harbor 401(k) plan. Curious, the ProNet Small Business Resource Center recently spoke with him to find out what's so urgent about retirement planning for entrepreneurs, and what's so special about so-called "safe harbor" plans.

Small Business Resource Center: What's the state of retirement planning among small business owners? Are entrepreneurs saving enough?

Harris: There is a definite mixed bag when it comes to retirement plans for small business owners. The reason I say that is there seems to be two schools of thought out there. The first is business owners who figure that they don't really have to put too much money aside in a retirement plan, because the business is their retirement plan.

The second group is the group that really understands the importance of the retirement plan. They max it out; they put everything they can into the retirement plan because they recognize that things beyond their control can occur and their business may not be worth as much as they would like it to be when they choose to retire. This second group recognizes the value and is also looking for tax advantages; they're saving because they want to reduce their taxable income.

SBRC: Why is a safe harbor plan a good option for the latter group?

Harris: If you're looking to maximize your benefit as an employer—your tax deduction—then you want a plan that will allow you to take full advantage of that. And that's currently the safe harbor 401(k) plan. With small business owners, it's very popular because it allows the business owner to set aside the maximum amount for deductions, provided they make modest contributions to their employees' plans.

SBRC: Ok, so how does a safe harbor plan work? What separates it from a regular ole 401(k) plan?

Harris: The difference is that a traditional 401(k) plan requires the employees to participate to a certain level. They've got to put money into their plans in order for the employer to get the full benefit.

So let's say I'm running a series of dry cleaners. I've got 25 employees, but only a third of them choose to put money into that plan. Well, there's a formula that limits the amount of the deduction for me as an employer. The safe harbor 401(k) says, "OK, Mr. Employer. If you're willing to match a certain percentage—4 percent, 5 percent or 6 percent of the employee's pay—of employees' pay, and you'll put money into a plan for your employees, then you can take the full deduction yourself. It doesn't matter how many employees participate. As long as you're putting some money in there you get the full benefit. That's why it's called a safe harbor.

SBRC: How does one shop for one of these plans?

Harris: There is a huge difference in the way these plans are administered and priced. So what you don't want to do is say, "Oh, that sounds like me so I'm going to go out and get a 401(k) safe harbor plan," then call up your good buddy who you play golf with who's a broker and say, "This is what I want to get." If you do that, you wind up with a very expensive, very pricey plan.

What you want to do is get at least three quotes. I say that because there are significant pricing differences between the providers of these plans. Normally, the most expensive plans are through insurance companies. Insurance companies do have these plans, but they charge a lot of fees and expenses that you normally do not have if you go with a provider, say, of mutual funds.

SBRC: Are 401(k) plans—of any sort—really the best option for small employers? Don't they come with high administrative price tags?

Harris: It is more expensive to administer a 401(k) plan because you've got to comply with all sorts of government regulations. That's an issue, but the tax advantages trump that.

Now, here's a secret: There's an outfit out there that administers 401(k) plans, and they're very affordable. They're called PAI and they provide all of the reporting for businesses; very few people know about them because they're so inexpensive, but they're an excellent resource.

SBRC: Still, let's say that I can't afford the administrative costs of a 401(k) plan—safe harbor or otherwise. What's my next best option?

Harris: There's something called the SIMPLE IRA. The reason that it's called SIMPLE is because the intent was to provide a plan that small businesses could contribute to that didn't require as much government reporting. And it does that; to a large degree, the SIMPLE IRA has been successful and a lot of small businesses use them.

The drawback is that the SIMPLE IRA does not allow as large a contribution; so you can't deduct as much off of your taxes as with a 401(k).

SBRC: How do the contribution limits of a SIMPLE IRA compare with those of a 401(k)?

Harris: Both allow you to put money aside. The SIMPLE IRA will allow you to put in $10,500 and deduct it; the 401(k) is $15,500. So, you can put more aside in the 401(k) plan compared to the SIMPLE plan.

SBRC: Let's set plan choice aside. Why is it important for small business owners to save for retirement—regardless of their vehicle for doing so?

Harris: It's all about you. If you want to have the resources to do the things you want to do when you want to do them, then a retirement plan is the vehicle that can enable you to get there.

SBRC: And finally, what's the best strategy when it comes to putting money away into your account, whether it's a 401(k), an IRA or a shoebox in your closet?

Harris: The key is: Invest in your retirement plan until it hurts. You know you're putting enough away when you're having to sacrifice a little bit for something else. This is money that will give you financial freedom and it's worth stretching.

This article is for information purposes only and is not intended as retirement advice. For more information about retirement planning, consult your financial planner.