We all know how important it is to save for retirement, but if you’re a business owner who wants to help your employees prepare for their future, you know it’s not an easy process—it requires taking on fiduciary responsibility and adding the extra work of managing a plan. Up until now, it’s been up to each business whether they provide a retirement plan or not. If you’re in California, that’s changing.
Recently, the state of California mandated that all employers with five or more employees implement retirement plans by June 30, 2022. Before you panic, they also introduced a way to help employers do so, through the CalSavers Program. This retirement plan vehicle gives employers an easy option to satisfy the mandate without taking on fiduciary responsibility for their employees’ plans. But is the CalSavers program the best option for every employer? Here are some important details to note.
What Is CalSavers and How Does it Work?
In essence, the plan functions as a Roth IRA; contributions are not tax-deferred, but retirement funds can grow tax-free with tax-free withdrawals in retirement. The program is voluntary for employees, who can set up an account with automatic deductions. The contribution limits are the same as those for Roth IRAs and are defined by the IRS. In 2021, the limits are $6,000 per year for participants under age 50 and $7,000 for those 50 and older. (1) When employers register with CalSavers, their employees will be automatically enrolled in the plan unless they opt out within 30 days. Employers cannot make any matching contributions to employee accounts.
Pros and Cons of CalSavers
The main advantage of the CalSavers program is that it’s simple and easy to set up for the employer. It encourages employees to take advantage of the benefits of a Roth IRA and develop a strong saving habit.
The downside is that the plan will force employers to take on an additional administrative burden. For many companies, CalSavers offers no benefit to the owners, partners, or key salespeople who usually earn too much to qualify for a Roth IRA (in 2021, single filers with a modified adjusted gross income of $140,000 or more do not qualify). (2) Also, the CalSavers plan only offers one way to save—if you want to give your employees the option of deferring taxes on their retirement contributions, you’ll need to look into other options.
Other Retirement Plan Alternatives
CalSavers may be a decent option for smaller businesses, but companies that can afford a little more administrative cost and offer matching retirement contributions may benefit from setting up a SIMPLE IRA or a traditional 401(k). These savings vehicles offer more flexibility and control than the CalSavers plan, and they allow owners and employees to make greater contributions to their retirement accounts.
It’s natural to feel an inclination to go with the simplest option, especially when you’re focused on the day-to-day duties of running your business. But sometimes that simplicity can come at the expense of missing out on valuable opportunities.
Explore Your Options
At Nichols Financial Strategies, we strive to help both business owners navigate the many financial challenges involved in running a business and managing their personal finances. If your company is considering how best to set up a retirement plan for 2022, reach out to us at 559-440-6999 or by email at email@example.com so we can explore the best strategies for your business.
T. Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.