Running your own business can be a tough gig, especially when it comes to finding, hiring and retaining the right talent. Employees are like business owners, they make career decisions on what’s best for their financial present and future. And whether you have a 401k plan or not could be a huge factor. But aside from being good for your employees, having a 401k for your benefits business owners in several key ways. Here’s what you should know.
Benefits To The Business
Having a 401k for your business is huge in terms of talent acquisition. This is especially true in today’s world where there’s increased competition for employee perks, and people are searching for financial security due to doubts of the future of social security. A 401k plan can be especially effective for attracting younger employees, who are looking to start their careers on the right foot when it comes to retirement planning.
A 401k can also help business owners save for their own retirement. Business owners can contribute to individual retirement accounts or to a Roth IRA if they have a 401k set up. The contribution limit for these plans is $5,500 a year ($6,500 for anyone 50 and older). It might not sound like a lot now, but maxing out your contribution annually (and investing wisely) will yield powerful results over time.
Moreover, the 401k plan sponsor will have access to a wider range of investment options than is offered by traditional retirement plans. Fidelity’s business 401k plan, for instance, provides a wide array of mutual fund options for business owners who set up an account.
Employers can also obtain tax credits to offset things like cost of starting your business or educating employees about their new plan. This comes under the Economic Growth and Tax Relief and Reconciliation Act (EGTRRA). Employers also receive a $500 tax credit for the first three years, and any matching contributions to employee plans are tax deductible.
Finally, pre-tax 401(k) contributions actually reduce the amount of employee's’ taxable income. This, in turn, serves to reduce overall employer payroll tax burden.
Benefits To The Employee
A business 401k provides many important benefits to employees as well. First and foremost, they’ll be 100 percent vested with their own tax-deferred contributions. That means that even if they’re terminated or decide to leave the company, the employee retains the rights to all of the funds they’ve contributed. Second, employees who retire any time during the calendar year in which they turn 55 or older, aren’t subject to the standard 10 percent penalty when withdrawing funds from their 401k.
Lastly, and one of the most attractive benefits for employees, is that all pre-tax 401k contributions are not subject to federal income taxes until a distribution from the plan is made.401k plans also allow Roth contributions which provides an alternative, since these monies are already taxed. So those contributions and earnings are tax-free when you withdraw that money. And any earnings, dividends or capital gains resulting from 401k investments are also tax-deferred until distribution. Now that you know the importance of setting up a 401k for your business, you should focus on choosing the right company to manage your plan. Take a close look at the company’s background, track record and personal/professional references. By setting up a 401k for your business with the right partner, you can help your employees (and yourself) be more financially stable well into your retirement years.
Now that you know the importance of setting up a 401k for your business, you should focus on choosing the right company to manage your plan. Take a close look at the company’s background, track record and personal/professional references.
By setting up a 401k for your business with the right partner, you can help your employees (and yourself) be more financially stable well into your retirement years.
Learn more about how a financial advisor can help your business set up and run a successful 401k for your employees. Contact us to speak with an expert today.
