Most architectural firm owners and managers must address critical priorities in addition to the business of architecture. These include managing taxes, attracting and rewarding valued employees, and establishing a long-term strategy to ensure their own financial security. Fortunately, as a firm owner, you have an option that could help to address all those goals: sponsoring a workplace retirement plan.
There are three broad categories of retirement plans available to architectural firms. The one you choose should reflect your firm’s size, financial situation, and ability to comply with regulatory oversight and administrative responsibilities. It is wise to work with a financial consultant familiar with retirement plan options.
A Simplified Employee Pension plan (SEP-IRA) may be ideal for a one-person firm. It is relatively inexpensive and easy to start and administer. SEP-IRAs also offer small firm owners flexibility regarding both the amount and timing of contributions. Thus, a SEP-IRA may make sense for a firm with profits that tend to fluctuate from year to year.
Some features of this plan type include:
- Employer, not employees, makes contributions.
- Employees are immediately vested.
- Once set up, the plan must generally cover any employee who is 21 or older, earned at least $600 from the business, and has worked there during at least three of the preceding five years.
- The 2017 annual contribution limit for each employee is 25% of compensation (or, for the self-employed, net earnings) or $53,000 – whichever is less.
The Savings Incentive Match Plan for Employees (SIMPLE IRA) is also valued for its ease of administration and is available to firms with 100 or fewer employees.
Features of this plan type include:
- Employees may contribute up to $12,500 of salary in 2017.
- Employer must make a matching contribution of up to 3% of each worker’s annual compensation, but may match as little as 1% in two out of any five consecutive years.
- Employer may instead make non-elective contributions equal to 2% of compensation for each worker who has earned at least $5,000 during the year, whether a worker has elected to contribute or not.
- For 2017, the maximum compensation amount that can be used to determine the contribution amount is $270,000.
Qualified plans are more complex than SEP-IRAs or SIMPLE IRAs and, therefore, have more stringent reporting requirements. But they can be more appropriate for larger or growing firms. There are several types of qualified plans, which can be broken down into two broad categories: defined benefit and defined contribution plans.
- Defined benefit plans—Commonly referred to as pension plans, defined benefit (DB) plans promise to pay employees a steady income stream in retirement. The amount each employee receives is based on earnings history and length of service. Employers must contribute enough to the DB plan each year to satisfy what is known as a minimum funding requirement. Due to the complexity of this calculation and other requirements, administration of a DB plan usually requires professional assistance.
- Defined contribution plans—With defined contribution (DC) plans, employers contribute into individual accounts for each employee. Employees may then be given the authority to invest the money as they see fit. DC plans do not require immediate vesting and may allow employee loans.
- Profit sharing plan—Employers can vary the amount and frequency of contributions based on fluctuating profits.
- Money purchase pension plan—Contributions are mandatory, and the percentage amount may not vary.
- Paired plans—Paired plans allow annual contributions to vary, but guarantee a minimum percentage. For 2017, employers can contribute the lesser of 25% of earned income or $53,000 to each participant’s profit sharing plan, money purchase pension, or paired plan account.
- 401(k) plans—These popular DC plans allow employee contributions (or “elective deferrals”). In recent years, 401(k)-style plans have become less complex and less expensive for smaller architectural firms. Participants may contribute up to $18,000 for 2017, and employers may also contribute. Total contributions to an individual’s account cannot exceed $53,000 or 100% of compensation, whichever is less.
Note that withdrawals from retirement plans are subject to ordinary income tax treatment and if taken prior to age 59½ may be subject to an additional 10% federal income tax penalty.
As you review these retirement plan options, keep in mind there are many points to consider. You’ll want to evaluate your firm’s unique needs and goals, and limit your own fiduciary responsibility. For these reasons, it is generally advisable to speak with a retirement plan expert before making any decisions.
The AIA Trust is here to help
The AIA Members Retirement Program is endorsed by the AIA Trust to provide retirement plan assistance to architectural firms to help you achieve your retirement goals. It’s one of the many ways that the AIA Trust makes it easier for you to focus on doing what you do best—architecture, your true passion.
With over 47 years of experience working with association members and 25 years specializing with architects. AXA Equitable can help you review your options and offer you choices that will alleviate the burden of establishing and managing a retirement savings plan. Please call 800-523-1125 to speak with a Retirement Program specialist or visit www.TheAIATrust.com/retirement-plans/ to learn how you can start saving today.