Retirement plans for the small winery

Congratulations! You just opened the doors to your micro winery. It’s a dream you’ve had since graduating from the UC Davis winemaking program, and it is finally a reality. You’ve just launched your first vintage with great fanfare, and you have great expectations. Customers are lining up at the door to your tasting room just to get a whiff of the magic you are pouring.

Why the heck would you be thinking about putting a retirement plan in place?  Well, here are some good reasons:

– In a fickle consumer products business, you never know when your product’s raving fans will decide to go elsewhere.

– You will eventually retire. (Yes, even you!)

– You want things to offer employees to attract and retain talent.

– It is a tool to help you manage your tax liability through retirement plan contributions.

Here are the retirement plan options you might consider:

Individual Retirement Arrangement (IRA):

Also called a Traditional IRA, although not technically a retirement plan offered through your business, it is an option for you to save for retirement. In 2018, an individual under 50 can contribute up to $5,500 ($6,500 if you are 50 and older), which may help reduce taxable income. For a married couple, that number doubles.  The catch is that if you take any of the money out before you turn 59 ½ you pay a 10% penalty on top of any income taxes the distribution creates. Further, the ability to deduct those contributions phases out once your income.

Roth IRA:

Originally named after the US Senator that introduced it, a Roth IRA allow contributions similar to a Traditional IRA ($5,500 or $6,500 per year), with a couple of important differences. First, the contributions aren’t able to be deducted, but any distributions come out tax free, once the requirements are met. Roth’s require the account to be open for 5 years, and the holder to be at least 59 ½ in order for distributions to be tax free. Roth’s also have some income thresholds.

SIMPLE IRA:

As long as you are a business owner, you can set up a SIMPLE. You can be a Sole Proprietor (Schedule C), Partnership, S-Corp, or C-Corp. A SIMPLE IRA is an employer-sponsored IRA in which the business owner sets up the plan and offers it to their employees. It has the benefit of higher tax deductible contribution amounts than a Traditional IRA ($12,500/year for those under 50, $15,500/year for those 50 and older). However, in exchange for that benefit, an employer contribution of 2% or a 3% match on employee contributions is usually required.

SEP IRA:

A Simplified Employee Pension IRA is an option for a business owner that is interested in maximizing tax deferred contributions. An owner can contribute up to a maximum of $55,000/year, but that maximum is limited to the lesser of 25% of W2 (wage) compensation or 20% of self-employment income (Schedule C owners). All contributions are made by the employer. Employees are not allowed to contribute. However, employees must receive the same proportional contribution rate as the employer. (i.e. if the owner contributes 20% of income to his account, he must contribute 20% of the employee’s wages to accounts on their behalf).

401(k) Plan:

A 401(k) plan is another tool that allows a business owner to make significant tax deferred contributions. In 2018, an employee under 50 can contribute $18,500/year. Those 50 and older can contribute $24,500/year. Additionally, an extra $36,500 can be made as an employer profit sharing contribution, for a potential total of $55,000/year (under 50) or $61,000/year (50 and older). For a married couple those amounts double. 401(k) plans allow plan sponsors (the owner) to limit their required contributions to employees (3-5% of wages) but with similar contribution limits as the SEP IRA. If a business has employees besides the owners, additional administration is usually required.

Defined Benefit Plan (DB, or Traditional Pension):

A Defined Benefit Plan is what is usually known as a pension, in which the employer makes deposits into an account for the employee (or owner) in exchange for a guaranteed account balance or income stream at retirement. Of all the plan types, a DB Plan has the largest potential to contribute tax deferred ($220,000/year in 2018), but also typically has the strictest requirements, usually requiring multi-year contribution commitments. These plans should only be considered by business owner that have sufficient and predictable cash flow to meet the contribution commitments.

 

This represents just a brief overview of some of the various types of retirement plans that a small winery owner might consider.  Of course there are lots of details and nuances that will impact the decision regarding which type of plan may be right for you. Before making a decision, your financial advisor and tax advisor to make sure you are educated about all of the various aspects of the retirement plan you are considering that may impact you.

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