Saving for retirement can seem like a daunting task, but it doesn’t have to be. I, like many others, do not plan on working my entire life. I need to be saving and putting money away now to retire on later. As a financial advisor, I work with business owners and their employees to save for retirement and reduce taxes. As a local business owner, I have the option to save for retirement through my own employer-sponsored retirement plan. There are multiple ways to put money away now that will benefit you in the future. An easy way to save a large amount of money at a significantly low cost can be through employer sponsored plans. However, the majority of Americans don’t have this ability to save with their employer. Why? Because most employers don’t offer this as a benefit. According to the Bureau of Labor Statistics, only 50% of Americans have access to any type of retirement benefit offered through companies with less than 50 employees. Of those with access, only 35% participate. This leaves a major gap of Americans who don’t have access to any retirement benefit through their employer.
California stepped in to provide a solution to narrow the retirement savings gap for Americans. As of July 1, 2019 there is a state retirement program called CalSavers.
What is CalSavers?
CalSavers is the new retirement savings program designed to give Californias an easy and simple way to save for retirement (www.calsavers.com). The state law will require employers who do not offer an employer sponsored retirement plan and who have five or more employees, to either sponsor a plan or participate in the CalSavers program.
CalSavers is a Roth IRA. Employers enroll in the program, and have 30 days after registration to notify CalSavers of all employees. Employees, are automatically enrolled and contributions to the account will be deducted from payroll. There is no cost to the employer, only to employees and there are ways to opt out of the program. So what’s not to like?
What’s bad about it?
It’s great that the government is trying to help people save; but, is one option right for everyone? Saving through an individual retirement account may not be appropriate for each person.
There are many tax benefits associated with retirement accounts and for a Roth IRA that is an after-tax contribution. However, some individuals may prefer to defer taxes until retirement. It is up to the individual to decide if he or she would rather pay taxes at today’s rate or defer until retirement. Focus on your own current financial situation and understand the tax implications on your retirement savings. How do you plan to reduce your tax burden and maximize your savings?
Another issue is contribution limits. Roth IRA’s allows an annual contribution of $6,000. Those individuals with higher incomes may not be eligible to contribute. If you earn more than the set federal income limits, you may need to opt out of CalSavers.
We can’t forget about the investment selection. CalSavers has arranged the investment options which may be different from what you might choose for yourself.
What are my alternatives?
Whether you are self-employed or are the owner of a small business, there are a wide range of retirement plan solutions that can fit your specific needs. Examples of retirement plans that can help you and your employees save for retirement while also providing some tax advantages are: SEP IRA, SIMPLE IRA, or a 401K. Let’s discuss the 401k because a majority of people are more familiar with this type of plan.
Any company can offer a 401k. The contribution limits are much higher than that of the IRA. The annual limit for a 401k is $19,500. An additional benefit although it is not required by the employer, is the potential for the employer to match contributions which could provide a greater incentive for employees to contribute.
Lastly, the fees with a 401k are relatively low for the group participants. The investment fees would be lower in a 401k than the investment fees that are included through the CalSavers program.
What to do now
If you are reading this article, it is time to see if the CalSaver program is right for you. Make sure to account for the factors I mentioned above. Ask yourself these questions:
- Are you saving as much as you would like for retirement?
- Do you have a company retirement plan positioned to meet your business needs?
- What are the tax consequences on my retirement savings contributions?
If you are feeling overwhelmed with your options, consider working with a financial professional to provide expertise and guide you with the right solution that will help you and your employees to maximize your savings to enjoy a successful retirement.
For more information go to www.sclafaniwealthadvisors.com or call us at 818-249-2085 to schedule an appointment today.