Do you know your options for retirement planning? Not only is it crucial to think about your own retirement, but a retirement plan can also be a great incentive for attracting and retaining employees. This week, we talk about the available options and how to choose the right one for your company.
Topics we cover in this episode include:
- What retirement plan options are available to contractors?
- How the Secure Act 2.0 may affect retirement plans
- Defined Benefit Plan vs. Defined Contribution Plan
- Why a Simple IRA might be a good place to start
- Work with a financial advisor to find the right solution for you
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
[00:00:00] Wade Carpenter: Welcome to the Contractor Success Forum. Today we are talking about retirement plan options for construction contractors, as well as some recent changes you need to know about. Retirement plans are great incentive for attracting and retaining employees, but too often, construction firm owners neglect their own retirement and need to figure out options that they have available.
So if that’s of interest, stick around. Let’s get into it.
If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs. My co-host is Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, what are we talking about today?
[00:00:39] Stephen Brown: Well, it’s a great idea for a topic and you certainly know more about it than I do. But my stepfather and my mother are getting a pension plan. Pension plans were provided for government employees, like my father and stepfather were city and state government employees, federal employees pension.
But what do you have to look forward to for spending a lifetime working for your construction company and you retire and you didn’t take advantage of their 401(k) plan, for example? So there’s nothing there. That’s your decision. I’m not gonna contribute a penny to this. What are your thoughts on that?
[00:01:18] Wade Carpenter: Well, there’s a lot of things that go into it and a lot of times, unfortunately, contractors I think, don’t think about their own retirement.
[00:01:26] Stephen Brown: They’re not even funding their own retirement, more or less their employees. Yeah.
[00:01:30] Wade Carpenter: Yeah. And a lot of times they get later in life and start feeling their age, and construction can be tough on a body.
[00:01:38] Stephen Brown: Well, millennials seem to be more interested as a rule, is what I hear, in how are you gonna help me retire?
[00:01:45] Wade Carpenter: Right. And for a lot of owners they, well, I don’t wanna put anything aside for my employees, but as bad as the market has been to attract and retain people into construction over the last few years, putting one of these into place is a key factor in people considering whether you they want to work for you or not.
[00:02:07] Stephen Brown: Absolutely. And as a CPA, you’re always trying to advise them on the tax implications, the tax savings. So if you can accomplish both, why aren’t you doing it?
[00:02:17] Wade Carpenter: Right. Well, I just wanna do a quick overview of that today and the different types of plans. Just a full disclaimer here that you should go talk to your own CPA, your own financial advisors on these things, because some of the things we may generalize about may not apply to you.
And there may be some factors that, whether it’s the way you’re structured, which we may get into today, but the way your business is structured may play into how much you can put aside.
[00:02:48] Stephen Brown: Absolutely. And we wanna remind you that as a listener you’re getting what you pay for. We’re just talking, we’re giving you our thoughts on things. You can’t sue us because we left something out, because we’re just talking.
That’s our disclaimer. Okay. There’s a lot of moving parts. Wade, let’s just talk about what retirement plan options are available to contractors.
What retirement plan options are available to contractors?
[00:03:11] Wade Carpenter: There’s the 401(k) plan that a lot of people know about. There are different derivatives for government employees and things like that. But the 401(k) allows you to put the most away and depending on how you write the plan, it can be flexible in what you do.
Essentially, there are three different types of 401(k). There’s the traditional 401(k) that, if you’ve got more than a hundred employees, it’s gonna cost you a little bit of money to administer. And there are definitely some compliance things you need to put in place. We’re gonna look at how highly compensated employees as to how much you can put away and whether you’re matching for others.
But, we have this top level, traditional 401(k) plan that there’s a lot more regulation on. They refer to the below 100 employees as a simple 401(k) plan. It is not to be confused with a simple IRA, but there is less regulation on that. And with that, over the last few years, they’ve actually made some of these plans a lot cheaper to administer.
So if you haven’t looked into that, you’re assuming it’s gonna cost you five or $10,000 a year, but a lot of those fees have gone away.
[00:04:27] Stephen Brown: Yeah, just in your administration cost to have someone manage your 401(k) for your company.
[00:04:32] Wade Carpenter: Well, not to mention this is a very specialized area, and this is somewhere where, especially if you’re administering your own, you can get in the weeds pretty quick and get over your head and do something inadvertently and cost yourself a lot of money and penalties. And so definitely get some good advice on this.
[00:04:51] Wade Carpenter: But the bottom level of the 401(k), they refer to as the Solo 401(k). You may have heard some of those. And that is for basically a one owner, one employee, 401(k). And it also can be a husband and wife if they work in the business. But if you have another employee or ever going to have another employee that wrecks the solo 401(k).
You know, I do have a lot of contractors that are essentially one man bands or general contractors, and they sub everything out. And if they can do that, or maybe them and their spouse works in the business and they’re never gonna have contract employees again, this may work, but it is very flexible in that we can really maximize how much we can put away tax free.
A lot of times the goal is how much can we defer or eliminate in taxes.
[00:05:46] Stephen Brown: I could understand a contractor saying, I don’t wanna mess with all that. But when you have experts guiding you, advising you, and you set it up right, the advantages are no-brainers. It’s just something that makes sense financially. That’s what the government wants you to do, Wade.
So few people in America, for example, have any savings whatsoever, and no retirement plan. And, we talked about employees that’s just oh yeah, I’m not contributing to that thing. Have you really thought about, well, how are you gonna retire? You’re just gonna live off Social Security?
That’s a huge issue.
How the Secure Act 2.0 may affect retirement plans
[00:06:20] Stephen Brown: We were talking about the Secure Act 2.0 that’s out there. Yet something else that may change the dynamic of how the 401(k) works. What do you know about that, Wade?
[00:06:31] Wade Carpenter: There was the original Secure Act that actually put a lot of incentives in here starting in 2023. There’s credits out there to take care of a lot of these administrative costs for setting these up. In some cases they’re covering the entire administrative costs for a year or two or three, and they gradually phase in how much they’re gonna cover of it.
But there’s some credits out there that incentivize companies to do this. And as you mentioned, there was the Secure Act 2.0 that was actually signed December 30th, 2022. That affects a lot of contractors, but businesses of all types, where they tried to add some additional things to encourage savings and, that’s the whole point of this. But I think there are some unintended consequences.
I talked to some experts yesterday about my own plan because we have a 401(k). I saw some of these things in the 2.0 act that I think are a disincentive to owners that I don’t think they intended. There’s two big provisions that the IRS deferred. One of them was just last Friday. That was one of these big sticking points, and I think there may be some revisions to this 2.0 version, but by and large, the idea is let’s make it easier for any business owner to put some retirement plans in place because you really shouldn’t be relying on social security. They’ve talked for years about whether it’s gonna be there when we’re ready to retire.
[00:08:13] Stephen Brown: Mm-hmm. Well, and when you’re young, you’re complaining about what you’re contributing to Social Security. You get close to retirement, you start thinking about it. But also how much you need to live, well, you gotta think about yourself as the owner of the company. You can’t always just say, well, by the time I retire my company, it’ll be worth enough for me to–
[00:08:34] Wade Carpenter: Yeah.
Well, just really quickly on third 401(k), generally speaking, you have an employee that’s going to have X amount withheld from their paycheck, and the company’s going to match a certain percentage of that. And depending on the type of plan, there may be some where, a safe harbor plan may allow you to put more aside if you essentially say, you’re gonna cover every employee if they meet eligibility requirements, whether they contribute or not.
There’s also the profit sharing plan. And the reason I’m bringing that up here is I mentioned the Solo 401(k), but it also plays into the traditional 401(k) of any type. A lot of these we can put a profit sharing component to this, and that allows you to maximize the amount you can put away. So if you’re trying to defer paying taxes, then adding this profit sharing kicker to it, that can definitely get you to where you can get some higher limits put in.
[00:09:41] Stephen Brown: Mm-hmm. And you have to have higher limits put in because you gotta pay taxes.
[00:09:46] Wade Carpenter: Right.
[00:09:47] Stephen Brown: Mm-hmm.
Defined Benefit Plan vs. Defined Contribution Plan
[00:09:47] Wade Carpenter: Now, a minute ago you talked about your, was it your parents that are on like a pension?
[00:09:53] Stephen Brown: Yeah. My mother and my stepfather both get pensions.
[00:09:57] Wade Carpenter: Right.
[00:09:58] Stephen Brown: It’s a pretty good one. I. They’re in situation where my father and my stepfather worked for the state and municipalities for a long number of years. Their perception was, I’m gonna work until I get the maximum amount of pension.
[00:10:13] Wade Carpenter: Right.
[00:10:14] Stephen Brown: I’m gonna keep funding this thing until it gets as big as possible. Then there’s those built-in incentives. But both of them live in a retirement home and it’s outrageously expensive, but the pension’s enough to pay for it.
And they’re in their late eighties and nineties so they don’t want to travel and do a lot. But those expenses are huge. And built into this particular retirement community is full-time care. Part of the benefit is you’re paying in the fact of, if I need 24/7 care, this facility has a different unit you move into that is available to you.
[00:10:49] Wade Carpenter: Right.
[00:10:50] Stephen Brown: So anyway, I’m just, I brought that up, Wade, ’cause if you hadn’t thought of that, and your kids have to pay for it, or they have to figure out how to do it.
[00:10:58] Wade Carpenter: Oh yeah. Well, so again, a pension plan. They used to be a lot more prevalent. And they probably are more in like government or something like that, but they’re very expensive because they’re what you refer to as a defined benefit plan.
[00:11:14] Stephen Brown: Mm-hmm.
[00:11:15] Wade Carpenter: The other ones we’re gonna talk about here with the 401(k), the profit sharing, the, IRAs, Simple IRA, sEP IRAs. They are what’s referred to as a defined contribution plan. We’re saying we’re gonna contribute a certain amount, and that’s going to be put aside for you.
In a defined benefit plan, a pension plan is something where we’re gonna say, we’re gonna put this in for you. You don’t have to contribute, but at your retirement or X number or date, you’re going to get. This amount in retirement. They’re defining what that benefit is. So hopefully that makes sense. And I did wanna mention that because they’re still very expensive.
They’re not as common, but we are seeing some plans, especially with contractors that are trying to really maximize what they can put away and put aside for themselves, I’ve seen some plans where we do a defined benefit component of that. There are some ways you can do a age payment comparability, but in the right circumstances, and really this needs to be somebody that’s really trying to put a lot away. But we can add a component of these defined benefit plans. Essentially a pension plan for the owner and put a ton of money away.
[00:12:34] Stephen Brown: That sounds like a no brainer.
[00:12:36] Wade Carpenter: Well, that’s where it definitely gets into the expense, and you really need to be able to maximize what you’re putting aside in a traditional plan first.
[00:12:46] Stephen Brown: Mm.
[00:12:47] Wade Carpenter: And again, you need to be working with a financial planner on this and planning this out and getting somebody to run scenarios for you.
[00:12:54] Stephen Brown: Mm-hmm.
[00:12:55] Wade Carpenter: There are people out there selling these variable universal life policies and stuff like that and those retirement plans and the only thing I’m gonna say about that is be careful about those things right now, because they’re insurance products and they can be incredibly expensive, but let’s stick to the retirement plans right now.
[00:13:14] Stephen Brown: Yeah.
[00:13:15] Wade Carpenter: So let me really quite a quickly the hit the other ones. You’ve probably heard about a IRA.
[00:13:21] Stephen Brown: Mm-hmm. Roth, IRA, right?
[00:13:24] Wade Carpenter: Yeah, there’s IRAs and there’s Roth IRAs.
[00:13:26] Stephen Brown: Oh, okay.
[00:13:27] Wade Carpenter: So for a traditional IRA, you’re gonna put money aside right now and you don’t have to pay taxes on it. Presumably you’re going to pay tax on it in retirement when your income is lower, your tax bracket theoretically would be lower. So it’s tax deferred right now, and that’s the same kind of benefit normally we have with a 401(k), unless we’re talking about these Roth provisions.
So we’ll talk about the Roth in just a minute. But on a IRA–
[00:13:58] Stephen Brown: Individual Retirement Account.
[00:14:00] Wade Carpenter: Yes, an individual retirement account, anybody can go do that with some limitations. The problem is a lot of people don’t know that if say you’re under a 401(k) at work, you’re probably going to be limited and possibly prohibited from making an individual IRA contribution.
As well as marital status, things like that, the income level all can play into what you can do as well as, If you make too much money on a W-2, you can be prohibited from doing a Roth IRA. So if you don’t have a plan and you have nothing at work, you can go to a bank or one of these investment brokers and set one of those individual IRAs up.
[00:14:44] Stephen Brown: Okay.
[00:14:45] Wade Carpenter: The Roth provision essentially says we want to put this money aside now, but we’re gonna pay taxes on it now. So it’s going to grow tax free over the years and we’re gonna get it out free in retirement. Now again–
[00:15:02] Stephen Brown: — like the best possible scenario because as it grows, you don’t have to pay taxes on it.
[00:15:08] Wade Carpenter: Well, I disagree with a lot of investment advisors ’cause they push Roths on people. But it would make sense if you’re 20 something years old and you’re putting money aside for a long time to go ahead and pay taxes.
[00:15:22] Stephen Brown: Mm-hmm.
[00:15:23] Wade Carpenter: Most of my business owners really are trying to save some taxes now.
Maybe they’re making more money now, and I still believe, assuming the brackets stay like that, you know you’re going to be paying at a lower bracket in your retirement. So I still believe it’s a great planning tool to go ahead and do the traditional IRA and and not pay that tax on it now, get the deferral right now. And that’s usually what my business owners want, they, they’re looking for that benefit.
[00:15:52] Stephen Brown: Okay,
[00:15:53] Wade Carpenter: So there are a couple of spins on the IRA. There’s the SEP IRA that I’m gonna just gloss over because a lot of times that can be a problem.
Basically the Sep IRA is Self-Employed Pension. So that’s really for self-employed people. And if you have employees, I’ve seen people do it, but they don’t realize the consequences of it. And I’m not gonna go deep in the weeds on that either.
Simple IRA: A good place to start
[00:16:17] Wade Carpenter: But for a contractor or any business that has just a few employees and they’re trying to get something started, there’s something referred to as the simple IRA. Essentially the simple IRA allows you to put something more than a traditional IRA in where, you may be limited to 7,000– these numbers get graduated every year. The numbers were 8, 9, 10, well, 11, 12, 13, 14 now. And if you get over, say age 50, They’re what’s referred to as these catch-up contributions.
But the simple IRA allows a company to create a plan for their employees and if they participate, they can have a certain amount contributed and usually there’s a match provision.
A lot of simple IRAs, there’ll be a 3% match usually. There are ways to say, well, we don’t have any profit this year and say, zero, but there’s some limits on maybe do it like one year. That is a cheaper way to get started on giving your employees some kind of benefit.
[00:17:20] Stephen Brown: Okay.
[00:17:20] Wade Carpenter: So that’s the Simple IRA.
[00:17:23] Stephen Brown: Okay, so we talked about 401(k)s, we talked about IRAs, we talked a little bit about pension plans. What else is there for retirement for employees?
[00:17:33] Wade Carpenter: There are some derivatives of these things. You and I may remember these, but a lot of people don’t remember — I actually have one client left that has a Keogh plan.
[00:17:42] Stephen Brown: Oh, yeah.
[00:17:42] Wade Carpenter: Do you remember what a Keogh plan? Most people don’t remember even hearing the name Keogh plan.
[00:17:47] Stephen Brown: I remember from a long time ago.
[00:17:50] Wade Carpenter: Yeah. Some of these have fallen by the wayside, but if you got them in place, there’s still some of them out there. There’s derivatives of them. These thrift savings plans, cash balance plans. But essentially those are the main types. And, starting with say like the traditional IRA, if you, if you’re trying to put aside some, you’re not gonna be able to put aside a lot there. The simple IRA allows you to do more.
The 401(k) allows you usually to do the most with something like a profit sharing plan. There are caps on things like how much you can contribute, even with a profit sharing plan, like 25% of compensation. And that’s where if you’re sole proprietor, schedule C contractor, what you can contribute is going to be based on your net income. Versus say, an S corporation owner that has compensation. It doesn’t matter what your profit is, it’s going to be based on your compensation.
[00:18:49] Stephen Brown: Okay.
[00:18:50] Wade Carpenter: And there are some hybrids of that, but…
Work with a financial advisor to find the right solution for you
[00:18:51] Wade Carpenter: These are the kind of things that contractors need to understand when they’re putting these in place as well as what they’re trying to do.
I see people bring me their taxes and they’ve done a IRA when they had a 401(k) at work. And then we have either a problem of paying a penalty on it or having to undo it. Those are the things that you really should understand the rules on it and get a financial advisor.
I’m not an investment advisor. Get somebody that does these and help you plan for that retirement.
[00:19:25] Stephen Brown: Okay. Any recommendations on how to find a good financial advisor? Just as general rule.
[00:19:31] Wade Carpenter: Well, I’ve got several people in this space that I I’ll know and work with, and there are some that are less scrupulous than others and I don’t want to get myself in trouble or–
[00:19:45] Stephen Brown: No, no, but their product is gonna have more incentive for them apparently.
[00:19:51] Wade Carpenter: Absolutely, and you should understand the fee structure of if you go to your broker or whoever it is. Some of them will charge based on, basically a fee-based advice. Some of them will charge based on the assets. And the assets, sometimes, I won’t get into a share C shares all this, iShares. But if you’re investing in a retirement and how they do the fees, they may take a larger chunk up front.
[00:20:22] Stephen Brown: Mm-hmm.
[00:20:23] Wade Carpenter: And as you contribute, they take that large chunk, but they don’t get anything on the back end. There are others where they will take a percentage of your assets as long as you’re working with them. So you know that’s your ongoing income.
[00:20:37] Stephen Brown: Be aware.
[00:20:38] Wade Carpenter: Be aware because some of these, their fees can be very expensive. Especially if you don’t realize that’s what they’re doing. A lot of times they will bury that in your contribution and you don’t really see how much is coming out. And I’m not trying to knock any, because a good investment advisor is well worth what you pay them.
[00:20:58] Stephen Brown: Absolutely.
[00:20:59] Wade Carpenter: But there are other ones that, their fees are based on and you’re seeing less of this now, but where they would, based on buys and sales and trading stocks and bonds. Every time you turn that up, they would earn a fee. And I saw people doing that to unfortunately, people in retirement and they didn’t know what they were doing.
[00:21:20] Stephen Brown: Yeah.
Well, that’s scary. And also you name the plan after your company for your employees, the so-and-so company employee 401(k) retirement plan. And ERISA requires you to bond 10% of that plan. You’re the fiduciary. So, you could open yourself up to a lawsuit by not handling this properly from your employees.
Another side, if you have an employee dishonesty insurance policy in place, they can usually endorse your pension and profit sharing plan, on your employee dishonesty coverage at no additional charge. FYI. For that bond that you need. But nevertheless there are a lot of moving parts to it, Wade.
I think you did a great job of hitting us with the basics. There’s just a lot to it.
I think the purpose of this podcast was to let people know what’s available. Just throw these names out there, throw these ideas out there throw your advice out there. And hopefully help contractors get their retirement plans set up properly, and have them work in the way in which they’re intended and have a plan in place that helps bring potential employees in the door.
[00:22:30] Wade Carpenter: Okay.
[00:22:31] Stephen Brown: Staying.
[00:22:32] Wade Carpenter: I only touched on the Secure Act and the Secure Act 2.0. I wanted to point out one issue before we wrap up, where the 2.0 that was signed in December 29th, December 30th, of ’22 basically mandated that Roth provisions in there. And one of the unintended consequences I think that is up in the air, it basically said that we’re going to bump up the amount, especially for catch up contributions and the amount you can contribute. But what it said literally is if you got over 145,000 in 2023 wages, your contributions, or at least a portion of it for 2024 were going to have to be forced onto a Roth provision.
Which means, you’re paying taxes upfront, which completely wrecked the–
[00:23:25] Stephen Brown: If it’s not tax deferred, it’s counterproductive.
[00:23:30] Wade Carpenter: Right. We actually were already putting some plans in place for this year and this is not a well-publicized one. Very few people are talking about this one. But if you’re limiting compensation to 145,000, you can’t max out your solo 401(k), your profit sharing. And so that was one of the huge things that I was like, oh Lord, we need to figure this out. And come to find out, just as of last Friday as we’re recording this, the IRS actually deferred that to 2024 for ‘ 25 wages. But in talking to the my people with the 401(k) stuff, these and some other things that I saw as well as they saw the same thing, and a lot of people are grumbling, hey, you may be shooting yourself in the foot, because that’s a little bit of a disincentive.
So, maybe we’ll do an update on this part, on the Secure Act 2.0 because there are some great features of it and there’s some great intentions that I think some are a miss, some are good hits, but anyway. I hope that sort of gives you an idea of why I was a little concerned about doing this one just now.
[00:24:38] Stephen Brown: Yeah, I understand. It’s potentially scary. Well, we’ll try to update our listeners on that in the future. I think that’s a great idea.
[00:24:45] Wade Carpenter: Okay. All right. Well let’s go ahead and wrap up. Thank you all for listening to the Contractor Success Forum. If you’re listening on some podcast engine somewhere, Check out the show notes at Contractor Success Forum dot com or on the Carpenter CPA’s YouTube channel
for more information, consider subscribing to this channel. Follow us each week as we post each episode, and we will look forward to seeing you on your next show. Thank you.