By Ed McClure, CFP®, PPC®
The state of California has mandated that all employers with five or more employees implement retirement plans by June 30, 2022. The state has also provided a vehicle, the CalSavers Program, to give 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? This article will take a closer look.
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 from the employer’s perspective. I believe it is a good idea because it gives employees the benefits of a Roth IRA. While anyone can set up a Roth IRA now, in reality, most people will simply not take the steps to set up an account. This program, I think, will encourage more participation overall.
The downside is that the plan will force employers to take on 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)
Other Retirement Plan Options
CalSavers may be a decent option for a few smaller businesses, but most companies are better off setting up a vehicle like a Simple IRA or a traditional 401(k). These vehicles offer more flexibility and control than the CalSavers plan, and they allow owners and employees to make greater contributions to their retirement accounts. Also, if you want to give people the option of deferring taxes on their retirement contributions, the CalSavers plan does not offer a way to do that.
I have found that business owners often fail to max out their retirement contributions because they don’t know about all of the different strategies available. It is 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 losing valuable opportunities.
I Am Here to Help
Small businesses are near and dear to me, as I run my own small business and have always respected entrepreneurship. One of the aspects of my job that I especially enjoy is helping both owners and employees benefit from the years of hard work they put into their jobs, knowing that they are working toward a future where they will be able to retire well and provide for their children and grandchildren. If your company is considering how best to set up a retirement plan for 2022, let’s talk soon and discuss how I can help you find the best solution. (3) Give me a call at (760) 607-0611 or email [email protected] to set up a consultation.
About Ed
Ed McClure is a CERTIFIED FINANCIAL PLANNER™ (CFP™), Professional Plan Consultant® (PPC®), and founder of McClure Wealth Management. With over 25 years of experience, Ed works with business owners who want to maximize their retirement plan benefits, businesses that need help setting up and managing a 401(k) for their employees, and families who want guidance while planning their futures. He is known for simplifying complicated and intimidating topics and making wealth management concepts easy for others to remember and understand.
Ed has established himself as a trusted resource for business owners and individuals, and his mission is to help his clients achieve the financial independence and well-being they deserve so they can give their time and energy to the people and things they love. He has a bachelor’s degree in finance from the University of Illinois. In his spare time, Ed conducts financial workshops for the Just In Time for Foster Youth organization, which helps equip young men and women as they come out of the foster care system. He also loves to travel and spend time with his favorite people. To learn more about Ed, connect with him on LinkedIn.
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(2) https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021
(3) No investment strategy can guarantee a profit or protect against loss.