5 Reasons a 401(k) Is an Owner’s Best Friend

A 401(k) is the kind of benefit employees expect. But it’s not only for them. Business owners can take advantage of the same 401(k) benefits employees enjoy—and then some. Like your employees, you can lower your taxable income and grow your retirement savings. Your plan can also be a tool that helps you manage the future of your company.

Let’s take a closer look at how a 401(k) can be an essential tool for growing your wealth as a business owner.

1. Lower Your Taxes

Who likes paying more taxes than they need to? No one. Yet, some business owners choose not to participate in their company retirement plan, leaving thousands of dollars of tax savings on the table every single year.

Annual pre-tax contributions limits are $23,000 a year as of 2024, with an extra $7,500 in catch-up contributions allowed for individuals over 50. You could be reducing your taxable income by as much as $30,500 per year while putting that money away for retirement! If your contributions are limited by low employee participation, a Safe Harbor 401(k) plan, which involves making a standard contribution to all employees or a matching contribution that meets the safe harbor requirements, can provide the needed boost. There are also other plan types, like profit sharing, which allow business owners to save as much as $69,000 per year before taxes—or $76,500 per year with catch-up contributions.

2. Attract, Retain, and Reward Top Talent

It’s not easy to hire in today’s job market. As of January 2024, the national unemployment rate was only 3.7%.¹ The most qualified job candidates are in highest demand, and they’re more likely to take a position with a company that has a top retirement plan.

But a 401(k) isn’t only about attracting new employees. It’s also about keeping the ones you already have. Many companies lose highly skilled individuals to competitors with better benefits. Nearly every valuable employee scours the job market for a better career opportunity at some point. Better retirement benefits could end up being a difference maker.

3. Retire On Your Terms

Sometimes business owners chose not to contribute to their company’s retirement plan because they want to save their profits in cash until another business venture comes along. Others think that selling their business someday is the only nest egg they need. And still others are content to draw income from their businesses after retirement, never considering the downside of putting all their eggs in one basket.

If your business is profitable, a 401(k) is a great way to secure a comfortable retirement from those profits. For example, profit sharing 401(k) plans with cross testing allow employers to put employees into different groups, which enables you to make higher contributions to business owners while still providing a valuable benefit to every employee.

4. Help your Employees Retire on Time

In the 2022 Transamerica Retirement Survey, 35% of respondents said they fear outliving their retirement savings and investments.² Even those who’ve worked for many years are worried, as 49% of Baby Boomers plan to work past 70—or not retire at all.³

Retirement is good for your employees. It’s also good for your business.

If your more highly paid veteran employees can’t make their exit for five or even 10 years past when you expect them to, how much more will you pay them versus a more junior employee in the same role? Each individual who does not retire at retirement age could cost your company in extra payroll expenses.

Employees who retire later also block advancement. A recent study of a change in Italian benefits that led to retirement delays found “longer average retirement delays cause larger decreases in wage growth for younger workers.”⁴ Employees who feel stuck are more likely to leave, which could mean losing talent exactly when you need it most.

Your 401(k) plan has a lot of potential to reward your employees and help them retire by retirement age. Features like profit sharing and employer match can jumpstart your employees’ savings and incentivize them to save more of their own income. Additionally, catch-up contributions allow employees age 50 and over to save an extra $7,500, which can ease the anxiety of retirement and help them look forward to the years ahead.

5. A Powerful Tool for Your Business and You

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 vision a reality. With its potential for lowering your taxable income, growing your retirement savings, helping your employees, and managing your workforce, a small business 401(k) plan is a management tool no business owner can afford to ignore.

Let's Make a Plan

Fisher's experienced retirement plan specialists can help you think more strategically about your retirement plan. Contact us today to begin building a 401(k) that’s good for you, your business, and your employees.

¹https://www.bls.gov/news.release/pdf/empsit.pdf

²https://transamericainstitute.org/docs/default-source/research/emerging-from-the-covid-19-pandemic-the-retirement-outlook-of-the-workforce.pdf (page 74)

³https://transamericainstitute.org/docs/default-source/research/emerging-from-the-covid-19-pandemic---four-generations-prepare-for-retirement-report.pdf (page 91)

⁴https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3470761 (page 2)