The Federal Thrift Savings Plan
The Thrift Savings Plan is a lot like a 401 plan on steroids, and its available to government workers and members of the uniformed services.
Participants choose from five low-cost investment options, including a bond fund, an S& P 500 index fund, a small-cap fund and an international stock fund plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent, says Littell. Another positive is that the investment fees are shockingly low four hundredths of a percentage point. That translates to 40 cents annually per $1,000 invested much lower than youll find elsewhere.
Cons: As with all defined contribution plans, theres always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
What Is The Best Investment Strategy For Retirement
Many workers have both a 401 plan and an IRA at their disposal, so that gives them two tax-advantaged ways to save for retirement, and they should make the most of them. But it can make sense to use your account options strategically to really max out your benefits.
One of your biggest advantages is actually an employer who matches your retirement contributions up to some amount. The most important goal of saving in a 401 is to try and max out this employer match. Its easy money that provides you an immediate return for saving.
For example, this employer match will often give you 50 to 100 percent of your contribution each year, up to some maximum, perhaps 3 to 5 percent of your salary.
To optimize your retirement accounts, experts recommend investing in both a 401 and an IRA in the following order:
Traditional Ira Income Limits
With a traditional IRA, you get an upfront tax breakyou can deduct your contributionsbut you pay taxes on withdrawals in retirement. One caveat: You can always deduct your contributions in full only if you and your spouse don’t have a 401 or some other retirement plan at work. Otherwise, your deduction could be reduced or eliminated, depending on your income.
Here’s a rundown of the 2022 contribution limits per the IRS:
|2022 Traditional IRA Deduction Limits|
|If your filing status is||And your modified AGI is||Then you can take|
|Single, head of household, qualifying widow, married filing jointly or separately and neither spouse is covered by a plan at work||Any amount|
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How Does The Aca Affect Nonprofits Offering Health Insurance
Nonprofit companies are no more exempt from ACA rules than for-profit companies.
Various federal, state, and local laws require that certain minimum benefits be provided to employees. The legally required benefits you need to offer largely depends on your company size and location.
Here are a few legal provisions you should have on your radar.
Who Are The Largest 403 Providers
|### 10 Largest 403 Plan Providers by Assets|
Fortunately for nonprofits, a 401 is a viable alternative to a 403.
Better still, for plans with fewer participants, new providers have entered the market with an eye toward automating a number of administrative tasks, and easing the enrollment burden on both employers and employees.
Some of these new 401 providers allow employees to set up and monitor their retirement accounts from their mobile devices. The idea is to lower the hurdle for employees to get invested while ensuring that they understand how their retirement plan operates.
The ability to deliver a retirement plan at low cost and handle much of the administration means that smaller nonprofits can afford to offer a defined contribution plan. As one of these new players, we were featured in a New York Times story on the challenges facing smaller nonprofits. The story details how an Austin-based education and research organization executive turned to ForUsAll after finding that insurance companies and other big 403 providers couldnt be bothered with the likes of her small operation. According to the organizations executive director, If youre a small nonprofit with very few assets, nobody really cares.
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Which Organizations Are Eligible For 403 Plans
According to the IRS, a 403 plan, or tax-sheltered annuity , differs from a 401 in that it can only be offered by public schools and certain tax-exempt organizations, such as:
An entity created under section 501 of the Internal Revenue Code.
Public school systems
Uniformed Services University of the Health Sciences
Public school systems organized by Native American tribal governments
Any 501 institution which might include a not-for profit university, religious organization or social service agency
For example, the organization might be operated for these purposes religion, education, charity, science, literacy, preventing cruelty to children or animals, and more. The eligible organization will typically be structured as a corporation, community chest, fund, or foundation. In general, an individual, partnership, or for-profit corporation wont qualify for a 403.
A First For The Nonprofit Sector:
As nonprofits, we play a vital role in the social and economic development of our communities. With a healthier and better-supported workforce, our organizations can lead by example, and be better positioned to strengthen our communities and our province. A decent retirement plan extends the sectors commitment to building a culture of decent work.
As part of its vision for a stronger nonprofit sector, ONN recommends the OPTrust Select pension plan. The plan offers a stable and secure path to retirement. Employers act as partners in supporting their staff through joint contributions.
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What Makes 403 Plans Unique For Nonprofits
Although 401 plans have gained popularity for nonprofits, 403 plans offer several features that 401 plans cannot provide.
Reduced discrimination testing: Administering a 403 plan can be easier in some cases, especially if the organization doesnt plan to make employer contributions . Theres no requirement to complete a top-heavy test or contribution , and other requirements might be lighter. Those features may make it easier for highly-compensated employees to make significant contributions when other rank-and-file employees choose not to participate.
Additional catch-up: If your plan permits, employees might be able to make additional catch-up contributions of up to $3,000 per year. But the organization and any employee taking that route both need to meet several criteria. The employee must have 15 years of service with the same employer, and the organization must be the right type of organization. That option might not be available unless you are a:
- Public school system
- Health and welfare service agency
- Convention or association of churches
Universal availability: 403 plans are typically available to all employees of the organization, with immediate entry into the plan. Some 401 plans limit enrollment to those who are at least 21 years old and who have worked for at least one year . That said, 401 plans are allowed to use less-restrictive criteria. 403 plans can exclude some categories of workers, like part-time employees, but you need to mind the details.
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*2019, 401k Book of Averages
Do Small Businesses Have To Offer Retirement Plans
The short answer is no. In fact, no private businesses in the U.S. are required to offer retirement plans to their employees. Many companies offer retirement plans as part of benefits packages to help attract and retain talent. For smaller companies, offering retirement plans may help bring in new workers, but it also may be the right thing to do for your existing employees.
Depending on your situation, its important to consider how retirement plans will impact your business and its employees. Benefits like retirement plan options or healthcare can be a major tipping point for employees who are waffling between staying loyal to your company and taking their talents elsewhere.
Key takeaway: There are no laws requiring small businesses to offer employee retirement plans. However, doing so can help you attract and retain top talent.
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Retirement Plan Information For Tax
By starting a retirement savings plan, an organization will help its employees save for the future. Retirement plans may also help an organization attract and retain better qualified employees. For more information, including a helpful chart comparing the features of available plans, see IRS Publication 4484, Choose a retirement planPDF for employees of tax exempt and government entities.
The IRS provides the following additional resources for tax-exempt organizations interested in establishing retirement plans for employees:
Getting The Maximum Match
If a matching contribution is made to the 401 plan, consider the maximum amount they need to contribute to the plan to receive the maximum available matching contribution.
For example, assume TJ’s compensation is $80,000 per year, and the match is $1 for $1 for up to 3% of compensation. They will need to contribute at least $2,400 to their 401 plan to receive the maximum available matching contribution of $2,400.
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Regardless Of Their Size Small Businesses Have Many Options For Employee Retirement Plans They Can Offer As Part Of Their Benefits Package
- Offering retirement plans to employees is a good way to attract and retain top talent in your industry.
- The IRS provides tax incentives to small businesses that offer retirement plans.
- There are several different plan types for small businesses, from simple plans that anyone can open to employer-sponsored plans for businesses with two to 100 employees.
- This article is for small business owners looking to learn more about retirement plan options for their employees.
Choosing the right retirement plan for your small business starts with researching all the options available to you and your employees. Analyze who your employees are and what retirement plan options make the most sense for them, then choose one that aligns with your small businesss needs and values.
Several different types of small business retirement plans are available, and plan providers have affordable, accessible options designed for even very small businesses. There are also some tax advantages that can offset the expense of sponsoring a small business retirement plan.
You can choose from simple plans that anyone can open, plans designed for self-employed people with no employees, or employer-sponsored retirement plans for small businesses that employ anywhere from two to 100 workers. Read on to learn more about the small business retirement plan options available to you and some tips to help you decide which ones you want to discuss with your CPA or financial advisor.
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What Are Some Features Of The Massachusetts Core Retirement Plan
The CORE Plan is structured in ways that make saving for retirement convenient, easy and tax advantageous. Features include:
- Auto enrollment If a non-profit business elects to participate in CORE, all of its employees are automatically enrolled into the program within 60 days. The initial contribution rate is 6% of pay.
- Auto escalation Employee contribution rates automatically increase by 1 or 2% annually, depending on individual preferences, up to a maximum of 15%. Plan participants also have the option to change their rate at any time.
- Pretax savings CORE makes it possible for employees to generate returns on money that they would have paid in taxes if it had not been deferred.
- Employer contributions Employers may choose to make Safe Harbor employer-matching contributions or Safe Harbor non-elective contributions, both of which increase the savings potential for employees.
Which Retirement Plan Is Best For Your Nonprofit
If you have a non-ERISA 403 and are looking to make employer contributions, you may want to consider who will handle the increased administrative load of an ERISA plan. Or if you are wanting to customize employee eligibility, then a 401 plan might be the right option for your 5013.
Note: The information contained in this post is not intended to be or relied on as legal advice. You should consult an ERISA attorney or another professional plan consultant before making any decisions or changes.
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Better Return Than Comparable Index Funds Across More Periods
10-year trailing periods, rolling monthly. Period analyzed is 20 years ended 6/30/22.
Percentage of periods with better returns than comparable index funds
Average additional return over comparable index funds across all periods analyzed
Past performance is no guarantee of future results.
a history of strong performance
Attention Small Nonprofits: If You Care About Your Employees Help Them Retire
Those that are attracted to the nonprofit sector tend to be a caring bunch. They are often paid under-market wages and work long hours, justified by the meaning we derive from our work and the good we are doing in the world. However, as much as we care, we ironically perpetuate inequality for those employed to do this good work. One key aspect of this phenomenon is how little grassroots nonprofits support employees in saving for retirement.
Although being without retirement savings takes longer to show its impact than more immediate benefits such as health insurance, saving for retirement is crucially important for well-being. The ability to work is a form of capital, often the most significant asset a person controls. In this way, for those who can work and are not wealthy, not saving is not simply missing an opportunity to build assets, but an actual reduction in ones financial position. As one ages, ones ability to work decreases. If this is not replaced with savings, ones financial position is reduced.
When nonprofits do not offer retirement savings, they make it more difficult for employees to eventually stop working when necessitated by age, illness, or other reasons . The important work of nonprofit employees ought to be rewarded with the ability to retire with dignity after a career of service.
All parties need to come together to create this reality.
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Setting Up A Backdoor Roth Ira
High-income earners cant contribute directly to a Roth IRA. But thanks to a tax loophole, they can make contributions indirectly and access a Roth that way. Using this strategy, taxpayers can save tens or even hundreds of thousands of dollars on taxes over the years.
A traditional IRA, on the other hand, doesnt limit or prevent people with higher incomes from contributing. The backdoor Roth takes advantage of this fact, and you can contribute to one yearly. The steps to take:
Step 1: Contribute to a traditional IRA. There are no income limits for making this contributionand it may already be after-tax money if your income is above the limits.
Step 2. Immediately convert your traditional IRA to a Roth IRA. Ideally, do this before your traditional IRA contribution has generated any earnings that will have to be taxed when you do your conversion.
Step 3. Follow the tax rules. If you took a deduction on your pre-tax contributions from your traditional IRA, you will owe taxes when you convert them to a Roth IRA, which is funded with after-tax income.
If you were unable to deduct your traditional IRA contribution , you wont owe further taxes except on any earnings .
However, if you have other money in traditional IRAs, there is a pro rata rule about how you are taxed on a Roth IRA conversion. This is not a DIY problem: Consult a tax advisor before doing your conversion.