Starting a 401(k) at your business? Here’s food for thought

So you’re a business owner and you’re thinking about starting a 401(k) plan for your business, but you’re not sure where to begin. Understanding 401(k) plans can be tricky, particularly if your business doesn’t have an in-house retirement plan expert. But considering how important retirement benefits are to workers, starting a retirement plan can be a good business decision. Let’s take a look at some details, and get you thinking about what you’d like to achieve with your company 401(k) plan.

  • Understand why you want to start a 401(k) plan. Knowing why you want to start a company-sponsored 401(k) can help you sort out the type of plan and features you’d like for your plan. Is it a tool to attract more talent to your business, as many workers find a retirement plan to be very important in their job search? Are you seeking personal tax deferral benefits? Or is it a tool to pay bonuses to managers and other high-earning employees in your business—or to help reduce your business tax burden?

Understanding what you hope to achieve by establishing a 401(k) can help you select the right type of plan for your business. It may be difficult for you, busy with day-to-day duties, to have a grasp on the many different plans and plan options available. If starting a 401(k) would be a mostly employee-oriented benefit for your business, check the pulse your workforce to find out what they’re looking for in a retirement plan before establishing one.

  • Take a look at the tax benefits. On the other hand, if the primary reason for starting a company 401(k) is to reduce your personal taxes or your business’s tax burden, you’ll want to carefully review the tax credits, deductions, and other tax benefits you’ll receive. Those benefits may include:
  • A $500 tax credit for each of the first three years to help offset administrative and setup costs (as long as your business has at least one employee, besides you, who earns less than $120,000 per year). The IRS will reimburse 50% of eligible costs that are necessary to establishing a startup plan.
  • If you decide to offer your employees a 401(k) contribution of any type (via a safe harbor, profit sharing, or a company match) those matches reduce your business taxes. This includes contributions to your own account.
  • 401(k) plans offer the highest contribution limits of any defined contribution retirement plan. Individuals can put away up to $24,000 tax-deferred per year (including catchup amounts) with a 401(k) plan.
  • Adding a Roth feature to your company’s 401(k) plan will allow employees to save additional money, but with different tax benefits: Contributions to Roth accounts have already been taxed, meaning retirement withdrawals will not be taxed again. And 401(k) plans don’t have income limits for Roth features, allowing contributions regardless of income.

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