Does an investment company require at least two members before it can set-up a new 403(b) plan within the corporation? What is the benefit of setting up a 401(b) account? If I am sending funds to invest in an IRA before tax, what benefit do I get?
Regarding your 403(b) question, a two-member requirement before the account can be set up has nothing to do with the Internal Revenue Service (IRS) code" said FPA member, Aaron Gabriel, CFP®, of Raymond James. "If a provider is telling you that they do not have a 403(b) product to cover just one person, then you may want to consider finding a new provider that can better accommodate your needs."
FPA member, Ronald Gin, CFP®, of Morgan Stanley said "the 403(b) is a qualified retirement plan usually set up for non-profit agencies. Some newer non-profits now opt for the 401(k) plan. I am not aware of minimum number of employee requirement for establishing a 403(b). For these type of plans, there are usually costs for administration (usually $1,000 or more annually), which might be prohibitive for only two employees. Some insurance companies might offer a special small-plan option."
"From a tax standpoint, the benefit would be ongoing tax-deferred growth while the assets are sheltered inside the 403(b) account," said Gabriel. "If you don't choose the 403(b) plan you might consider a solo 401(k) or SEP-IRA. I know that in the 401(k) world, a single individual/company can open a 401(k) plan (e.g. a doctor/lawyer/business person, but there are administration costs), or, of course, for a self-employed individual, the Individual 401(k) or IRA-SEP," said Gin.
"There is an IRS rule that states that if your company offers a qualified retirement plan, your Standard IRA contribution may not be tax deductible," said Gin. "A Roth IRA would be an alternative if your company offers a 403(b)/401(k) plan."
Gin also noted that the IRA maximum contribution is currently $5,000, $6,000 if you are over 50 years of age, and phased out of deducting your IRA if your income is too high. The maximum contribution into a 403(b)/401(k) is $16,500 and $22,000 if over 50 years of age, and not subject to phase-out for income levels. "Biggest benefit is pre-tax dollars and it would reduce your current tax liability," Gin said. "But more importantly, you would start saving for your retirement."
"You might also consider the SIMPLE retirement plan too if you have a handful of employees and the 403(b) administration fee is too expensive," Gin said.
"Finally, I would suggest that you contact a local CERTIFIED FINANCIAL PLANNER™ professional in your area to further discuss this issue and its relevance with your overall financial goals and objectives," said Gabriel. Find a financial planner at FPA's PlannerSearch.