FEBRUARY 2019
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FINANCE

Retirement Plans for Small Businesses – PART 2

By haren mehta

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary — there's usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and "substantial and recurring," for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2018 can't exceed the lesser of $55,000 or 100 percent of the employee's compensation.

401(k) plan

The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a hugely popular retirement savings vehicle for small businesses. With a 401(k) plan, employees can make pre-tax and/or Roth contributions in 2018 of up to $18,500 of pay ($24,500 if age 50 or older). These deferrals go into a separate account for each employee and aren't taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.

You can also make employer contributions to your 401(k) plan — either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2018 can't exceed the lesser of $55,000 (plus catch-up contributions of up to $6,000 if your employee is age 50 or older) or 100 percent of the employee's compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.

401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren't disproportionately weighted toward higher paid employees. However, you don't have to perform discrimination testing if you adopt a "safe harbor" 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees' contributions (100 percent of employee deferrals up to 3 percent of compensation, and 50 percent of deferrals between 3 and 5 percent of compensation), or make a fixed contribution of 3 percent of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.

Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they're still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven't become popular.

Defined benefit plan

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement (for example, an annual benefit equal to 30 percent of final average pay). As the name suggests, it's the retirement benefit that's defined, not the level of contributions to the plan. In 2018, a defined benefit plan can provide an annual benefit of up to $220,000 (or 100 percent of pay if less). The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors.

In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

As an employer, you have an important role to play in helping America's workers save. Now is the time to look into retirement plan programs for you and your employees.

IMPORTANT DISCLOSURES

Securities and Investment Advisory services offered through SagePoint Financial, Inc., member FINRA/SIPC and a registered investment advisor. Fixed and/or Traditional Insurance Services may be offered through Capital Insurance & Asset Protection LLC, which is not affiliated with SagePoint Financial or registered as a broker-dealer or investment advisor.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Haren Mehta, managing partner of Capital Insurance & Asset Protection in Tampa, can be reached at (813) 679-5204 or email haren@mycapitalinsurance.com


FINANCE

When Can You Use a Section 529 Plan?

By SEEMA RAMROOP

Millions of Americans use 529 plans to sock away money for their kids’ and grandkids’ education. They are popular, in part, because of the tax benefits they can provide: withdrawals, including any earnings, are federal, and possibly state, income tax free when they are used for qualified education expenses. Previously only applicable to college-related expenses, effective Jan. 1, 2018, 529 plan holders can also use up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school.

Besides tuition and fees — the biggest educational bills you will probably face — other eligible expenses include such things as room, board, books, required supplies, the purchase of computer and peripheral equipment, computer software, or Internet access and related services, and certain expenses in the case of a special-needs beneficiary, as defined by the Internal Revenue Code.

But there are limits to what sorts of expenses are allowed. “Using 529 funds to pay for a music degree at an accredited institution for your daughter would be fine, but if you use them to pay for private piano lessons, you will be penalized,” says Richard J. Polimeni, director of the Education Savings Programs at Bank of America Merrill Lynch. “That penalty essentially means you have to pay income tax on the earnings portion of the money you withdrew, as well as a 10 percent additional federal tax.” However, you will never pay income tax or the additional federal tax on the principal portion of your withdrawal, regardless of what it is used for.

The rules are fairly flexible when it comes to how many students can benefit from your 529 account. “Suppose you set aside $200,000 in an account for your daughter and you spend only half of the money,” Polimeni explains. “You could transfer the rest to an account for another family member of the beneficiary, for example, your son or even a niece or nephew.” If there is something left over, it can stay in the account indefinitely —and be ready, decades later, to help pay the cost of a grandchild’s education. Or it could even be used to fund your own or your spouse’s continuing education.

If you want to set aside money for lessons or other educational activities that a 529 account does not cover, you could consider a trust or a custodial account under the Uniform Gifts/Transfer to Minors Act (UGMA/UTMA). However, there are potential drawbacks to that strategy, Polimeni warns. “These gifts cannot be taken back and do not allow you to transfer assets between beneficiaries. And once the child you designate as beneficiary reaches age of majority — which varies by state — he or she will be free to spend the money for purposes other than education. “If that is a concern, you may decide you are better off using a typical savings or investment account to earmark money for educational goals that a 529 account does not cover,” Polimeni says. “Working together with your outside tax and legal specialists, and your financial advisor can help you figure out what makes the most sense for your family.”

For distributions after December 31, 2017, qualified higher education expenses include tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. These distributions are limited to $10,000 per calendar year, across all 529 accounts for the same beneficiary. State tax treatment may vary.

Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and other subsidiaries of Bank of America Corporation.

Investment products:

Are Not FDIC Insured

Are Not Bank Guaranteed

May Lose Value

MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

© 2018 Bank of America Corporation. All rights reserved. ARBBCL88

For more information, call Merrill Lynch Financial Advisor, Seema Ramroop of the Clearwater office, at (727) 799-5621 or email seema.ramroop@ml.com

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