401(k) plans are one of the most popular types of retirement savings vehicles available today because they’re flexible and provide solid benefits to both business owners and employees.
Business owners can choose from a broad menu of plan features to design a 401(k) that meets their objectives, including whether they want to make contributions to their employees’ accounts or not. Employees can put money into their 401(k) accounts directly from their paychecks, making saving for retirement convenient and automatic. Studies have shown that participating in an employer retirement plan, such as a 401(k) is one of the most important factors in helping American workers save enough money for retirement.
In addition to helping build financial security in retirement, 401(k) plans provide tax benefits for both the business owner and the employees.
The business owner may take a tax deduction for their contributions as well as their employees’ contributions to the plan. Deductions are also allowed for plan expenses paid by the business owner.
Pretax contributions deducted from an employee’s paycheck and contributed to a 401(k) plan are not included in the employee’s taxable income for the year, which lowers their income tax liability and possibly their tax bracket.
If a 401(k) permits Roth contributions, employees may choose to have an amount deducted from their paychecks after taxes have been withheld, and then contributed to the plan as Roth contributions. These after-tax contributions will be tax-free when withdrawn from the plan. Any investment earnings in the Roth account will also be tax-free if withdrawn after the employee is age 59½, disabled, or deceased.
A tax credit of up to $1,000 is available for low-to-moderate income taxpayers who contribute to a 401(k). Business owners may also be able to claim a tax credit for plan start-up costs up to $5000 within the first three years of the plan. Business owners who sponsor a plan with auto-enrollment may receive an additional $500 tax credit.
Business owners choose to establish a 401(k) plan for many reasons:
A 401(k) has flexible plan features that allow business owners to tailor a plan to their specific business objectives, such as offering a retirement savings vehicle for minimal cost while rewarding long-term employees and maximizing the tax benefits for plan contributions.
A 401(k) plan is typically designed to allow a business owner to choose when and how much to contribute to their plan. A business owner with fluctuating revenue is not locked into making a plan contribution each year.
A 401(k) can be an essential component of an employee benefits package that is competitive in attracting and retaining new employees.
A business owner may take a loan from their own 401(k) account before retirement as long as loans are also available to all participating employees in the plan.
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A 401(k) offers many advantages from an employee’s perspective:
Payroll deduction, automatic enrollment, and automatic escalation features make it easy for employees to participate in a 401(k). In a traditional 401(k) plan, an employee who is eligible to participate may elect to have a portion of their salary deducted from their paychecks and contributed to their plan account.
They only need to make this election once, and it remains in effect until they change it. Plans that are designed with automatic enrollment will automatically enroll all eligible employees into the plan at a set savings rate unless the employee elects to change or stop the contributions. Some plans also contain a feature that will automatically increase employees’ saving rates on a periodic basis unless an employee opts out of the feature.
A 401(k) plan has higher contribution limits than an IRA, enabling employees and business owners to build a significant retirement nest egg faster. Employees and business owners may select a percentage of their salary to be contributed to the 401(k). Many financial professionals suggest that individuals save 10% or more of their income during their working years to fund their retirement. Employees and business owners may contribute up to $23,000 in 2024.
Most plans allow individuals who will be age 50 or older before the end of the year to save an extra $7,500 each year in a 401(k) as a catch-up contribution to accelerate savings.
Business owners typically make contributions to supplement employees’ savings.
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401(k) plans provide affordable access to investment options as compared to an individual investment account.
Employers, also known as plan sponsors, are held to fiduciary standards of conduct designed to protect employees’ interests in the plan. Having a plan solution that helps the employer from a tax, operational compliance, and fiduciary perspective is critical, while also having a solid provider that has that has a proven track record.
If eligible to take a withdrawal from their 401(k), an employee can move their 401(k) savings to another retirement plan or into an IRA.
401(k) assets are not subject to creditors’ claims, which means that employer/employee savings remain secure.
If you’re a small business owner and need a 401(k) plan for yourself and your company, only Ubiquity Retirement + Savings™ offers flat-fee plans plus free expert advice.
We’ll fully customize your 401(k) 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 401(k) 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.
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