Songifying Your Retirement Plan Options
Acronyms and IRS codes are the bane of financial planning and accounting education.
I suppose government regulations and tax laws aren’t allowed to have big, flashy labels but our current terminology is bland if not confusing. 401(k)’s, SEPs, SIMPLEs.
Heck, if you took the initiative to research what a SEP stands for you’d learn it’s SIMPLIFIED EMPLOYEE PENSION.
“So it’s a pension!?” Technically yes because it’s employer-funded but functions more like a profit-sharing plan.
And I’m not sure about you but if I see SIMPLE as an acronym on a retirement plan menu, I’m going with it. But SIMPLEs are hardly used anymore.
So I’m making some changes.
Out with the technical jargon and in with song titles to capture the essence of each plan you may want to consider for your business.
CalSavers Retirement Savings Program:
Phantom Planet’s California
For you California business owners with 1-4 employees approaching the mandatory retirement plan deadline, the CalSavers plan is the easiest to set up.
Employees are auto-enrolled in a Roth IRA with contributions automatically deducted from employee paychecks. Employees can adjust their savings rates or opt-out if they aren’t interested.
No employer contributions required, no requirement to manage a plan’s fund lineup.
Easy peasy.
Just make sure you set up your account before year-end. If not, per-employee penalties ensue.
Californiaaaa, Californiaaaaaaaaa. Here we come!
Solo 401(k):
Mashup between Eric Carmen’s All By
Myself and Bill Wither’s Just the Two of Us
I’ve become a fan of electronic and DJ music since moving to the west coast a year ago so let’s start out with a mashup. Not the most uplifting start BUT no reason to be sad about a Solo 401(k). Solos are the king as far as flexibility and contribution limits are concerned.
The wrinkle and the reason for the Carmen/Withers mashup? If your spouse earns income from your business, they can also contribute to a Solo.
Contribution limits: High. $23,500 maximum as the employEE + 25% of your W-2 wages as the employER contribution with a combined limit of $70,000.[i]
Remember, you are both an employee and the boss in a one-person + spouse company. Add a $7,500 catch up for the 50-59 year old crowd.
Traditional and Roth options are available. If your income is highly variable each year, open both and focus more on Traditional pre-tax for high income years and Roth for lower income years.
Loans are available. Consider this a last resort funding option.
Deadlines: Must be set up by December 31st. EmployEE contribution deadline is also December 31st while employER contribution deadline is your tax filing date + extensions.
Planning Power: If you are set up as an S-Corp or partnership and find yourself outside of QBI deduction eligibility as a service business (consultant, doctor, lawyer, advisor, accountant), the Solo 401(k) is a powerful way to lower taxable income to bring you back into or under the QBI phaseout range. We’re talking tens of thousands in tax savings.
SEP IRA: Frank Sinatra’s My Way
Frank did it his way and so can you with a SEP IRA.
SEPs are easy to set up and administer over 401(k) plans.
Why My Way? All contributions are made by you, the employer. No employEE contributions to SEP IRAs.
You can contribute up to 25% of compensation up to $70,000 for 2025. The catch? You MUST contribute the same percentage of pay to all eligible employees.
Fortunately, you can change your contribution percentage each year so another great option for highly variable income businesses.
Contribution deadline is your tax filing date + extensions.
Keep in mind, there’s no Roth option for SEP IRAs.
Use these if you want minimal hassle and wish to contribute a set percentage across your full-time employees.
If you are a solo business owner, Solo 401(k)s are by and large the better option.
SIMPLE IRA: Zombie by the Cranberries
SIMPLEs were originally designed for small businesses with 100 or fewer employees, but with the rise of more affordable 401(k) plan options, SIMPLE IRAs are hardly used. Throw in favorable small business retirement plan tax credits and SEPs as 401(K) alternatives, SIMPLEs are more/less obsolete.
What’s in your headdddd, in your headdddd???? Not a SIMPLE IRA as a retirement plan option.
Nevertheless, some highlights of SIMPLE IRAs:
Relatively easier and less onerous than a 401(k) plan.
Employers must match either 1) up to 3% of compensation, or 2) a 2% nonelective contribution for every eligible employee.
Employee contribution limit is $16,000/yr + $3,500 catch up for 50 years and older.[ii]
Employer contributions vest immediately.
Roth SIMPLE IRAs became available under SECURE 2.0 in late 2022, a welcome development for SIMPLEs.
Strict two-year rollover rule: If you roll your SIMPLE IRA into a retirement account that is NOT another SIMPLE IRA, this is treated as a distribution. You pay taxes plus a 25% early withdrawal penalty. A steep price to pay. After the two-year window has passed? You can rollover into IRAs or other qualified retirement plans.
401(k): Alicia Keys & Jay-Z’s Empire State of Mind
If your vision is to build a large company, the 401(k) is the go-to solution.
They can be onerous to administer and maintain both in complexity and compliance with ERISA laws (the minimum standards for US retirement plans) but that’s the price you should be willing to pay to attract and retain employees at all levels.
Contributions can be made into Traditional or Roth accounts and in the form of both employee and employer contributions.
You can offer a set lineup of mutual funds or allow for self-directed brokerage which essentially allows the employee to invest their 401(k) as if it were a brokerage account held at Schwab, Fidelity, Vanguard etc.
Loans are allowed up to the lesser of $50,000 or 50% of the employee’s vested balance.
Contribution Limits for 2025:
Employee limit = $23,500 (+$7,500 catch-up if age 50+).[iii]
Total combined limit (employee + employer): $70,000 + catch-up.
Matching employee contributions is free money for your employees and a deductible expense for your business. I love a good win-win.
Add an after-tax, Roth conversion feature to keep those high-earning employees happy with one of my favorite strategies, the Mega Backdoor Roth Conversion.
The not-so-fun part of using a 401(k)? Compliance.
Your plan must pass nondiscrimination tests (ADP, ACP) to ensure the plan isn’t favoring you, the owner, or highly compensated employees. Safe Harbor 401(k) provisions can bypass most testing by guaranteeing minimum employer contributions.
Moreover, all companies offering 401(k) plans must file Form 5500 every year.[iv]
Despite these costs, 401(k) plans are wonderful, tax-efficient wealth building strategies for your employees.
There are retirement plans for companies of different sizes and for business owners with different goals.
Consider the contribution limits, the obligations and/or ability for the employer/employee to contribute, the account types available, investment options, the compliance and administrative requirements and tax efficiency when deciding on a plan.
And if all the retirement plan jargon scrambles your brain, come back to Retirechella whether the weather is warm and the tunes tell the story for each plan.
Need help sorting through your options? I’m a Zoom call booking away.
[i] or 100% of compensation, whichever is lower
[ii] Super catch-up limit for SIMPLE IRAs is the greater of $5,000 or 150% of the standard age 50+ catch-up limit, which is $3,500 in 2025, making the super catch-up limit for those 60-63 $5,250 (150% x $3,500).
[iii] In 2025, individuals aged 60 - 63 who participate in 401(k) or similar retirement plans can make super catch-up contributions up to $11,250
[iv] Solo 401(k) plan values over $250k also need to file Form 5500
Two Palms Planning LLC, doing business as Two Palms Financial, is a registered investment adviser registered with the State of California. Registration does not imply a certain level of skill or training. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. The information contained herein is based on current tax laws and regulations, which are subject to change. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.
