Since 1978, employers have offered a 401(k) as a savings vehicle to help employees and business owners save for retirement. This plan offers unique short and long-term tax advantages for both parties.
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401(k) contributions are deducted from employees’ taxable income for the year to a maximum of $20,500 for those under 50 and $27,000 for those over 50. So, if you make $100,000 this year and contribute the maximum $27,000, you will owe taxes on $73,000. If your tax rate is 25%, the $27,000 you put into the plan means $6,750 less in federal taxes paid. You save that $27,000 for retirement, but it only costs you $20,500, assuming you chose traditional pre-tax contributions.
If you expect to be in a higher tax bracket in retirement, you may opt for Roth 401(k) contributions where you don’t reduce your earned income by the contribution amount, but all funds grow tax-free and no tax is owed when you take the money out in retirement.
Employers can write off $250 per Non-Highly Compensated Employee enrolled in the plan – for a savings of $500 to $5,000 per year, over three years (up to $15,000 total).
Employers who choose auto-enrollment can write off $500/year for the first three years ($1,500 total). This credit applies to employers who convert an existing 401(k) plan to automatic enrollment.
A business owner can deduct up to $61,000 from taxable income per year when the maximum $20,500 is reached, along with a 25% profit-sharing contribution. The amount can be doubled if the business owner’s spouse also contributes to the plan.
For employers, offering a 401(k) with matching contributions is a generous benefit for current and prospective employees that reduces recruiting costs, cuts employee turnover, and improves productivity. For employees, a 401(k) match is free money that grows a retirement nest egg exponentially year over year.
To learn more about the 401(k) plans offered to small businesses, contact Ubiquity today.
If you are a small business owner and need a retirement plan for yourself and your company, only Ubiquity offers flat-fee plans, plus expert guidance along the way.
We will fully customize your plan to meet the specific needs of your small business.
Setting up a 401(k) can be complicated. Only Ubiquity gives small business owners access to retirement experts in addition to industry-leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.