The Benefits of 401(k) for Small Business Owners

I’ve written recently about many different reasons individuals should embrace their company 401(k) plans, but what about business owners? The same benefits employees enjoy from a retirement plan can extend to business owners—and then some. Truly, a small business 401(k) plan is something like a multi-purpose tool for business owners. Depending on their need, employers can use a 401(k) as a tool to lower their taxable income, to grow their savings for retirement, and even to manage the future of their companies.

Lower Your Taxable Income

“Who here likes paying more taxes than they need to?” This might sound like a silly question, but it’s one I ask whenever I meet with employers and employees to talk about retirement. It probably doesn’t surprise you that I never see a hand go up. But, nevertheless, I still meet people who choose not to participate in the company plan but could still afford to. In my opinion, this is a bit like sending extra dollars to the tax man every paycheck.

Annual pre-tax contributions limits are $18,500 a year as of 2018, with an extra $6,000 in catch-up contributions allowed for individuals over 50 years of age. That means anybody, including business owners, could be reducing their taxable income by as much as $24,500 per year! It’s especially easy for employers to maximize their contributions if they adopt a Safe Harbor 401(k) plan, which involves making a standard contribution to all employees, regardless of how much they contribute to the plan. There are also other plan types, like profit sharing, which allow business owners to save as much as $55,000 per year before taxes—or $61,000 per year with catch-up contributions.

But tax benefits don’t stop there for business owners. There’s also a tax credit available for many small businesses with less than 100 employees starting a small business 401(k) plan for the first time. If you qualify, you can get a $500 credit for each of the first three years of a new plan. You can also deduct any plan management expenses you pay and any matching contributions the business makes to employees participating in the plan.

Increase Retirement Readiness

I recently met with a company that had several owners, most of whom were participating in the company plan. One owner had chosen not to contribute at all, preferring to save his profits in cash and wait to invest them in a future business venture. This is surprisingly common, even among employers who do offer a 401(k) plan. Many business owners believe they’ve got enough money from their business, and they don’t need a retirement plan. Others might plan to sell their business someday to build their nest egg. Others still plan to draw income from their businesses after retirement—but I can speak from experience that you can’t always count on your business remaining profitable for years after you leave it.

For the owners of profitable businesses, a 401(k) is a great way to secure a retirement with the same standard of living they enjoy today. There are many creative ways for business owners to save a lot of money into a retirement account without having to break the company’s bank, like profit sharing 401(k) plans with cross testing. These plans allow employers to put employees into different groups, allowing higher employer contributions to some—like the business owners—while still providing a valuable benefit to every employee. That way, employers can work towards a higher maximum contribution of $55,000 or more.

Help Employees Retire

Four-out-of-five Americans prefer to work for an employer who offers a 401(k) plan.1 Offering this benefit could mean the difference between keeping that key employee or losing them to the competition. But this benefit also applies to the future of your business. Many companies are finding that 401(k) matches are playing a significant role in their ability to set employees on a track to retire when the time comes. Helping your employees retire makes it easier to pave the way for the next generation of talent for your business, while also containing payroll costs. After all, younger workers generally cost less than veteran employees, so it’s in the best interest of any employer to make sure their employees are prepared to enjoy their retirement at the appropriate time.

401(k) for Small Business Owners: A Powerful Tool

As you think about what the future holds both for your business and for you personally, remember that a 401(k) plan can play a significant role in making your visions a reality. With its potential for lowering your taxable income, offering you a chance to grow your retirement savings, and helping you manage the future of your employee base, a small business 401(k) plan is a tool no business owner can afford to ignore.



1 Fisher Investments 401(k) in the Workplace Study. October 2016.

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