Ep 12 - Casey McCarthy on Building a Bulletproof Retirement Plan for Small Businesses

Voiceover: [: 00:00:00

Now, your host.[00:00:30]

podcast. And today we have a [: 00:00:45

But EIP is a third party administrator and Casey's gonna go into that, [00:01:00] uh, here in a minute. But they partner with us and they have since, I guess it's been about 2013. So I had actually first met Cory Brash, who is the, uh, owner of EIP. We were in the same rotary club. Uh, and went out to to lunch one day.

And, [: 00:01:15

Um, but it's been a great relationship, uh, and they've definitely kept us in line and made sure that all of our plans stay compliant, but. Uh, Casey, I guess we can just kind of start with why don't, why don't you tell us what a third party administrator [00:01:45] is and what you guys do and how you help companies like ours.

one part of the, uh, of the [: 00:02:00

And the reason that it's important to have those two components is because a 401k is really a generic term [00:02:15] for a lot of different bells and whistles you can have in your retirement plan. Um, there's a lot of different decisions to be made. We help consult, I help consult to make those decisions with the business owner as well as the advisor because I kind of say the advisor is the quarterback of the situation.[00:02:30]

ut away for them themselves. [: 00:02:45

Most are designed with both in mind. Um, business owners spend so much of their time and effort building their business that a lot of times they get a little bit of a late start on their retirement saving. And so if they, you know, get to 45, 50, [00:03:00] 55 and decide it's time to really ramp that up, 4 0 1 Ks a lot of times get started then.

n, I'd say the best place to [: 00:03:15

Jeb Graham: Yep. And real quick, just so to, to differentiate our role versus your role.

gonna educate the employees. [: 00:03:30

And you guys are actually number one, keeping that, that, that plan compliant, right. And making sure that ev that it, it meets the rules of a 401k plan. Yeah. Uh, and then you're also, to your point, [00:04:00] designing it with the business owner. To, to help them maximize the amount of money that they can either save on taxes, uh, by, by making contributions, possibly doing profit sharing, and then also, um, you know, maybe just [00:04:15] saving into the Roth portion of that as well.

So you're, you're helping them kind of design it to where it benefits them and their employees in the best way. Correct.

h the fund decisions. We are [: 00:04:30

Um, but yes, uh, you also as the advisor decide who the TPA is gonna be. So you decide if we're the firm to hire [00:04:45] and you decide who the custodian is gonna be, which is where the assets go, when somebody puts money in the plan or the business puts money in the plan. Um, so yes, that's exactly right. So there's, there's different, different players in the 401k because of the fact that, that each.

Each role [: 00:05:00

Ethan Hutcheson: Nice. Casey, we, we come a lot. We, we've got a lot of small business owners, and a lot of the times, just to your point, you know, they, they might be later in life and, and they've got the business going and [00:05:15] now they're ready to, to start buckling down, right? There's a lot of options that are out there.

we kind of discuss with our, [: 00:05:30

Casey McCarthy: Absolutely. Um, so let me start with asep. Asep. [00:05:45] ASEP is a simplified employee pension plan, and that's usually a great option for somebody who's a sole proprietor individual. Um, who wants to put away, you know, some money more than an IRA or a Roth IRA? Um, a simple is, now you, [00:06:00] you guys deal with SEP and simples more than I do.

ens is. The most basic thing [: 00:06:15

The first thing is you can put a lot more into a 401k than you can with a simple. A [00:06:30] simple, you're limited to the 16,000 if a sated deferral if you're under 50 and it's 19,500 if you're 50 or older. Or if you're old, uh, 50 or older. Correct. Um, that's for 2025. And then the employer can either do [00:06:45] a, uh, dollar for dollar match up to 3%, or they can do a 2% non-elective contribution is what we call it.

k? Sure. Yeah, that'd great. [: 00:07:00

With that, the employer can do what's called a safe harbor contribution, which is, like I mentioned, the dollar for dollar match up to three or the 2% non-elective [00:07:30] contribution is simple. It's similar, but we recommend a dollar for dollar match up to four or a 3% non-elective contribution. Safe harbor is another story.

entioned earlier, allows the [: 00:07:45

Um, that can get anybody who's under 50 up [00:08:00] to 70,000 with those buckets all added up. And then anybody 50 or older can get to $77,500. So. Wow. So the, the, the main, the main difference with a simple, in my opinion and a 401k is the contribution limits. The other kind of [00:08:15] ancillary, um, addition to that is. You can have a lot more restrictive.

employee to be vested, which [: 00:08:30

If you tell a prospective [00:08:45] employee, Hey, we have a simple. They might be like, I don't know what that is, but everybody knows a 401k is a nice benefit and it's touted all the time. So I think that's kind of the summary, kind of the comparison between those. Ethan.

Ethan Hutcheson: Yep. Nice.

elt that it's, you know, the [: 00:09:00

You got the self-employed. That'd be a good option for a set. You got a little, you know, kind of a startup plan. You wanna keep the lower cost lower, uh, IRS filings. You go with [00:09:15] the civil, and then you get a little bit more complex, a little bit more contribution limits, and you go to the 401k. And then there's, there's other, other, uh, avenue, which is called a cash balance plan.

recently with a cash balance [: 00:09:30

Casey McCarthy: Absolutely. Great question. Um, [00:09:45] I kind of would say that a cash balance plan being added to a 401k, so a 401k is a 401k and a profit sharing plan together. So I'll just call it 401k. When you have a 401k and you add a cash balance to it, I kind of say you kind of bolt it onto the 401k 'cause they work in conjunction, [00:10:00] you're kind of supercharging your retirement because you're not only getting the 70,000 or the 77,500 in the.

ed benefit plan. And kind of [: 00:10:15

Pay for somebody's [00:10:30] retirement until they pass away. Back when these were popular, people didn't live to be a hundred, a hundred plus. Um, and so they've kind of gone away. But this type of defined benefit plan is still employer contributions only, but it [00:10:45] kind of has a 401k type feel to it. But it allows people to contribute much more.

And it's all in tax deferred [: 00:11:00

The amount you can save, but they're also more expensive. We actually, [00:11:15] um, hire a, we partner with a firm out of Chicago that does a phenomenal job and all they do is cash balance 'cause it requires an actuary. They've got, I think, 70 actuaries on staff now. We don't have any actuaries on staff. We stay on our lane and do 4 0 1 Ks.

but I completely agree with [: 00:11:30

Ethan Hutcheson: So, uh, small clarification on that piece.

and let's say they're above [: 00:12:00

So

sharing plan is gonna be the [: 00:12:15

Legal entities. These trusts the, the defined contribution 401k and the the defined benefit cash balance. The testing has to work where the amount going into cash balance, which is really where the business owner can maximize their, their contributions into [00:12:45] retirement. It has to work in conjunction with the profit sharing part of the 401k.

her, both of them. So. Great [: 00:13:00

Jeb Graham: amazing.

Casey McCarthy: Yeah, it is.

Jeb Graham: Well, I'll, I'll tell you too, so I know when we work with business owners, I feel like there's, there's two purposes for them doing a retirement plan.

ves and for their employees. [: 00:13:15

Casey McCarthy: Yep.

Jeb Graham: And, um, and being able to put money away.

s have changed now with Roth [: 00:13:30

Um, so let's talk a little bit about the tax credits and tax [00:13:45] benefits. I know we had secure Act 2.0. You've got. Pre-tax, post-tax contributions. So let's hit on that.

act that passed at the end of: 2022

I will say most of them are kind of throwaway. I mean, a lot of these things we're probably never gonna see 4 0 1 Ks [00:14:15] incorporate the thing that just jumped out where I. As the Director of Business Development thinking, oh wow, this is huge, is these tax credits being offered. The IRS with the original Secure Act was offering some tax credits for businesses to encourage them to set up [00:14:30] plans.

ore. Never had a simple or a [: 00:14:45

But if you've never had a plan at all and you're setting up a 401k, and especially if you're setting up a 401k and you have a number of employees, they're pretty rich. So let me kind of walk through the three. [00:15:00] The first is called the administrative, um, the administrative expense tax credit. And this is.

le and they finally set up a [: 00:15:15

So let me first all, first of all say what [00:15:30] a non-high compensated employee is. The IRS breaks every plan into a highly compensated employee and a non highly. A highly is an owner, a direct family relative, a relative of an owner who's working in the business, or somebody who earned more than [00:15:45] $155,000 last year for this year would be considered a highly comped employee.

ree years. The second one is [: 00:16:00

For every employee who made less than a hundred thousand dollars that they do that for. So if the business has 10 non highs, 10 staff and the business gives them a thousand dollars or [00:16:30] more, they're gonna get a $10,000 tax credit for years one and two. And that trails off for year three, four and five. 75%.

x credit, years one and two. [: 00:16:45

It basically says if you, if you become [00:17:00] eligible in a plan and you as an employee don't opt to get in the plan or opt not to get in the plan, if you do nothing, you're gonna be swept into the plan because it's to your benefit and it's. It's good for everybody, but if you set that feature up, you get a $500 tax credit for [00:17:15] three years.

ve or free for three to five [: 00:17:30

Jeb Graham: That's right. Well, I, why weren't these credits available when we set up our 401k?

Casey McCarthy: Good point. Exactly.

Jeb Graham: So that's awesome. But that's awesome.

Casey McCarthy: Yeah. [: 00:17:45

Jeb Graham: Well, and I know too, I guess, I guess lastly, um, maybe just we can hit a little bit on, on Roth contributions and maybe some misconceptions there. Um, and, and we run into this all the time, like we'll have a client in and we're like, Hey, you should do your Roth [00:18:00] 401k.

, not been able to do a Roth [: 00:18:15

Casey McCarthy: Yeah. That's great. Um, so, and just to, to let everybody know for 2025, the maximum that a single person can put into a Roth, uh, or the, the [00:18:30] maximum income that a person can make and still contribute to a Roth, just a Roth IRA is $161,000. If you make $161,000 or more, you can't even contribute to a Roth at all.

. [: 00:18:45

It can be partially Roth. We've got plenty of, of, um, employees at businesses and plans that we administer who do 50% in traditional 401k contribution and 50% Roth. But [00:19:15] that's a great point. You can still do your 23,500 or 30, 31,000 into Roth, and it's kind of a way to skirt that, that, that, uh, negative to making good money.

mmer that they can't put put [: 00:19:30

Jeb Graham: I'll tell you too, when we build out financial plans for clients, you'd be surprised.

now, this can of worms, but, [: 00:19:45

And you'd be surprised that people that are in a very high tax bracket that the plan will still say to do a Roth 401k specifically, uh, when they're younger, right? Because their money's is, their money has so much more time to grow and it grows tax [00:20:15] free. It lowers their required minimum distributions down the road.

ke the money out and you pay [: 00:20:30

So,

things I say about the Roth [: 00:20:45

Your tax if, and it's just traditional, your taxes that you just earned, [00:21:00] uh, $500,000. So don't assume your tax level is gonna be lower when you retire, but I think the key to a Roth for anybody of any age is its tax diversification. You then have, so the way I look at it is I've put money in Roth and traditional, [00:21:15] um, over the years and when I retire, what that means is if I know I wanna take out a certain amount of money, I can take out.

free money from my Roth. So [: 00:21:30

[00:21:45] So it's tax diversification as well.

Jeb Graham: Yeah. Yeah. It gives you a lot of flexibility in, in retirement. Yep. So,

Casey McCarthy: exactly.

to, uh, for coming on. Thank [: 00:22:00

Hopefully we'll be, have you on here again someday. So,

Casey McCarthy: absolutely. And, and thank you for your partnership. You, you, you, you guys have been great at Metcalf Partners. You've done a great job with us and we really appreciate the partnership.

Jeb Graham: That's [: 00:22:15

Voiceover: Thanks for tuning in to Metcalf Money Moment, the podcast. We hope [00:22:30] today's episode provided valuable insights to help you unlock financial clarity, confidence, and peace of mind. For more expert advice and resources, visit metcalf partners.com. Until next time, make every money moment count.[00:22:45]

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