In Part 1 of this series, we talked about how a SEP plan can work nicely for the owner of a business with no employees. But what is the right retirement plan for a company that has employees?
Usually the best place to start is to answer this question: Why does the business want to implement a retirement plan?
- Is it to attract and retain top talent by providing a competitive employee benefit?
- Or is the primary objective to help the business owner maximize tax-deferred savings?
- Or is it a combination of both of these objectives?
Once this is known, a third-party administrator (TPA) can pinpoint the best types of retirement plans that the business will want to consider.
Let’s assume that the business determines that in order to attract top talent, they need to offer a retirement plan. One of the first plans that should be considered is a 401(k).
What is a 401(k) Plan?
A 401(k) plan allows employees to make contributions to a retirement plan from their pay. This is called a 401(k) deferral because instead of receiving all of their pay, they direct the employer to deposit a portion to the retirement plan. Saving in this way helps the employee accumulate funds they will need at retirement. Key features of a 401(k) include:
- 👍 Employees can defer up to $22,500 per year for 2023 (or $30,000 if at least age 50)
- 👍 Employees can defer on a pre-tax basis or after-tax basis
- 👍 Employees can save much more in a 401(k) plan than the annual IRA limits allow
- 👍 Employees can rollover retirement accounts from former employers’ retirement plans, making it easier to consolidate retirement savings
Why is a 401(k) Valuable for my Employees?
There are many reasons, some mentioned above, but a key benefit is the POWER OF TAX DEFERRAL. By investing in a retirement plan on a pre-tax basis, you owe less in taxes today and therefore have more dollars to invest.
Plus, taxation on investment growth is deferred until retirement dollars are withdrawn so your money keeps working for you for many years before you owe Uncle Sam!
There are several types of 401(k) plans. In Part 3 of our “Keeping It Short & Simple” series, we provide the key differences between each type of 401(k) plan.