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Retirement Part 1: Why have a retirement plan?

in today's presentation retirement part one why have a retirement plan we will discuss the benefits of offering a retirement plan for your child care business the information contained here has been prepared by civitas strategies and is not intended to constitute legal tax or financial advice the civitas strategies team has used reasonable efforts in collecting preparing and providing this information but does not guarantee its accuracy completeness adequacy or currency the publication and distribution of this information is not intended to create and receipt does not constitute an attorney client or any other advisory relationship reproduction of this information is expressly prohibited whether it is just for you as the sole owner or for a large center with many employees retirement is an increasingly critical benefit for child care businesses there are three key reasons to start your retirement plan having enough money to retire retaining your employees including yourself and keeping your hard-earned money having enough money to retire takes a great deal of saving Financial experts estimate that most individuals will need up to 80 percent of their pre-retirement income to maintain their standard of living once they stop working that means if you are making thirty five thousand dollars today you will need to have twenty eight thousand dollars a year every year from when you retire onward however the average benefit paid by the Social Security Administration is only fourteen thousand four hundred dollars a year leaving a large gap for many people to retire comfortably fastest way to get the savings you will need relies on compound interest where the money you make on your savings is reinvested here's how compound interest works let's say you decided to have one less Mill out a month and you put that fifty dollars into your retirement savings instead let's also assume you have six and a half percent interest rate which is the average for 2022 for retirement accounts in the first year you will have saved six hundred dollars and made 18.20 in interest now in the next year you have 618 dollars and 20 cents in savings your original six hundred dollars plus the interest of 18.20 and with interest and the monthly contributions you'll end the year with 1277.81 cents as this continues over 30 years you will have saved eighteen thousand dollars and accumulated thirty seven thousand three hundred eight dollars and ninety cents in interest for a total of fifty five thousand three hundred eight dollars and ninety cents because retirement savings is critical and can add up over time it can be a great tool for retaining your staff in a Morgan Stanley 2022 survey ninety three percent of employees consider retirement programs a draw as they decide where to work having a retirement Savings Program can help you keep the employees you have and attract new ones in this competitive labor market remember this also includes yourself if you are the sole owner and employee you need a retirement plan too and many child care providers have been tempted to leave the profession for other jobs with retirement benefits by providing yourself with the benefits you need you can stay in child care and prepare for your future a key benefit of business retirement accounts is the opportunity for business contributions or matches where the child care business makes additional retirement contributions or matches employee contributions to the employee's retirement as we will discuss further in the next section most plans allow or even require companies to provide some contribution to the employee's retirement these contributions can be a set amount a percentage of the employees compensation or a match which means that the employer will contribute the same amount that the employee contributes often up to a certain percentage for example an employer may offer to match the money contributed to a retirement account up to three percent of the employees salary this could mean that for a person earning thirty thousand dollars a year and contributing nine hundred dollars annually which would be three percent their employer would also contribute or match the nine hundred dollars increasing the total contribution to eighteen hundred dollars this match is essentially free money for the employee and is an incentive for employee retention since they are getting additional funds beyond their regular compensation however the money is oftentimes not available until the employee is vested vesting is the time it takes for the business portion of the retirement account to be fully owned by the employee and can vary from business to business es can choose for employees to become vested upon hire or require that they are employed for a certain amount of time up to six years to become vested for example let's say you make a six hundred dollar contribution in 2022 and you have a three-year vesting schedule typically that would mean if the employee left your business at the end of 2023 they would only have one-third or two hundred dollars the rest would return to the business because in this case they would be considered partially listed if they left at the end of 2024 still only partially vested two-thirds or four hundred dollars would follow them it wouldn't be until the end of 2025 that they would have the full six hundred dollars if they changed jobs as at that point they would be fully vested implementing a vesting period can also encourage employees to remain employed at your child care business so that they are able to access a hundred percent of the employer contributions to their retirement most business contributions are on average 4.3 percent of the employee's annual salary however there are a few additional considerations first you should check what other child care providers are offering in the area a retirement contribution is like any other form of employee compensation you want to keep up with or even surpass the other businesses in the area so employees don't leave turnover can be costly an estimated 1.5 to 2 times an employee's salary according to LinkedIn when you factor in the time needed to recruit and hire for the open position overtime hours needed from other employees to feel the Lost capacity and the time and cost of onboarding regularly checking on the retirement Plans offered by other area providers can help you keep your staff and reduce the cost of turnover second the majority of employers in the U.S if their retirement plan allows it opt to require matching and vesting a match means that an employer will contribute only if the employee makes one as well typically matches are 50 percent of the employee's contribution to a certain level for example let's assume an employer has a 50 percent match for up to three percent of the total salary if an employee makes thirty five thousand dollars and contributes three percent of their salary for retirement that is one thousand fifty dollars the employer will only contribute 525 dollars further employer contributions are often vested where possible vesting is the amount of time it takes for an employee to entirely own an employer match or contribution to their retirement usually this is based on how long they continue to work for the business as an incentive to stay in our example above if the employee had to wait three years to be vested and left after two years they may just get a portion of the employer contribution so maybe 75 percent of the 525 dollars through regular contributions and compound interest this becomes a great incentive for employees to stay with your business finally you can keep more of your profit through retirement savings between the tax benefits and potential credits from the federal government there are savings for employers and employees There's an opportunity to save in three ways contributions your business makes to the plan and the cost of maintaining it are deductible even if it is just for yourself retirement plans are tax favored and retirement contributions can get you tax credits contributions your business makes to the plan and the cost of maintaining it even if it is just for yourself or deductible this will cut the amount of Revenue taxed by your business which also lands on the personal income tax return retirement plans are taxed favored that means that the government gives you tax benefits to encourage you to save some retirement uses pre-tax money this means that the money you put in now is taken out of your income so it isn't taxed today however whatever money you make in the account over the increased value of the investment will be taxed so for example the five thousand dollars you invest in a SEP IRA today won't be taxed but the additional fourteen thousand three hundred and fifty dollars you may gain over the next 20 years in investments will be when you retire retirement contributions can get you tax credits specifically the Savers credit and the retirement plan startup costs tax credit the Savers credit is a non-refundable credit available to adults over the age of 18 who are not dependents of someone else or students the program will give you a credit worth up to fifty percent of your contributions to your retirement up to one thousand dollars in credits if you are married and have an adjusted gross income less than seventy three thousand dollars you are a head of household making less than fifty four thousand seven hundred and fifty dollars or single and making less than thirty six thousand five hundred dollars remember your adjusted gross income is typically less than your total income so even if your salary is higher than the limit you may still qualify the retirement plan startup cost tax credit is open to employers who have retirement plans that include W-2 employees who are not owners the credit was just updated in December of 2022.

if a business has 100 or fewer employees this credit covers up to five thousand dollars in administrative costs for the first three years of a new 401K 403 b profit sharing SEP IRA or simple IRA plan additionally businesses was with less than 50 employees can get a credit of up to one thousand dollars per employee in the first year of the plan for contributions they make for employees who earn less than one hundred thousand dollars this credit continues for three more years with the credit decreasing by 25 percent in each subsequent year so if you had an employee making thirty two thousand dollars a year and you contributed one thousand dollars a year to their retirement over five years you would get a total credit of two thousand and five hundred dollars let's look at two examples of how these savings can benefit you kashana is a family care business owner and sole proprietor who made thirty eight thousand dollars over the course of the year she put two thousand dollars into a simple retirement account we will cover the types of plans later in part two of this guide the two thousand dollars will save her three times over first she will save 15.3 percent in self-employment tax and 12 percent in income tax for a total of five hundred forty six dollars second she qualifies for the Savers credit so she gets a tax credit for 50 percent of the contribution in this case kashana has two thousand dollars for her retirement and after the money saved and the credits the cost to her was only 454 dollars Estelle has a center with 15 employees and she decided to use some of her stimulus money to start a 401k her business is an LLC that declared to be treated as an S corporation so the profit goes on to her personal tax return which is taxed in the 22 percent bracket still contributes at five percent of the salary of each employee one thousand five hundred sixty dollars per employee for a total of twenty three thousand four hundred dollars between the fees and the cost of her time to set up and have her bookkeeper help her with the 401K she paid 2 550 dollars between her contribution to the retirement and the administrative cause Estelle paid a total of twenty five thousand nine hundred fifty dollars however Estelle was able to save money in three ways first since the 401K is new she gets 100 percent of her administrative costs back that's two thousand five hundred fifty dollars second since our employees make less than one hundred thousand dollars she can get up to a thousand dollars for her contributions per employee for a total of fifteen thousand dollars this is a total of seventeen thousand five hundred fifty dollars in tax credits third she gets the deduction for the contributions and administrative costs which saves her another five thousand seven hundred nine dollars all in all Estelle's benefit cost her twenty five thousand nine hundred fifty dollars but she saved or received credits for a total of twenty three thousand two hundred fifty nine so she really only spent two thousand six hundred and ninety one dollars plus a stale can share information on the Savers credit for her employees so they will receive their tax credit and greater benefit setting up a retirement plan through your business will help you and your employees prepare for a successful retirement provide additional retention incentives and help you save money in the long run to learn more about selecting a retirement plan see retirement part two how do I choose the right retirement plan thank you for joining me as I mentioned stay tuned for part two of this guide and if in the meantime you are interested and other helpful resources information or guides visit childcare.texas.gov to find these on various topics in both English and Spanish there you can also sign up and register for free one-on-one business coaching

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