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Top Reasons to Start a 401(k) for Your Small Business
When it comes to retirement benefits, there are a lot of good options to consider. Many small businesses choose a 401(k) plan because of its flexibility and the many benefits it can offer not just employees, but also business owners themselves. From tax benefits, to attracting talent, to increasing retirement preparedness, here are the top reasons for a small business to start a 401(k) plan.
1. 401(k) Can Reduce Taxes
For many small business owners and CFOs, managing tax strategies is just as important as increasing revenue; every dollar saved is a dollar earned. When mounting tax liabilities are a concern, starting a 401(k) can be a great way to increase tax deductions—both through tax credits and deductible expenses for those employers who choose to offer an employer match—while adding a competitive benefit for employees. Specifically, a 401(k) can help in two ways:
- Small Business Tax Credit: For employers with 100 or fewer employees, there is a special tax credit designed to help minimize the costs of setting up a new 401(k). This credit allows small businesses to write off 50% of the costs of starting and implementing a new plan (including the costs of educating employees) for the first three years, up to $500 per year.1Since this is a general business credit, it can be carried back or forward to other tax years if a business can’t use it in the year it becomes available because they’ve already reached their maximum possible deduction for the year.2Speak to a tax attorney to confirm this benefit and how it applies to your unique situation.
- Deductible Employer Contributions: Some employers choose to add an employer match to their 401(k) plans, which allows them to contribute money into their employees’ retirement accounts alongside the savings their employees contribute. For example, an employer might offer to match employee contributions dollar-for-dollar up to the first 3% of an employee’s salary, or to match 50% of employee contributions up to the first 6%. In either scenario, the contributions the employer makes are considered compensation, and are therefore tax deductible for the business. There are also other types of employer matches worth considering when setting up your 401(k) plan.
2. 401(k) Can Help Owners Save For Retirement
The tax benefits of a 401(k) don’t stop with the business; it can also help business owners lower personal tax liability and save for retirement. All contributions from employees and owners into their own accounts are made on a personal pre-tax basis, up to $22,500 per year with traditional 401(k) and $66,000 per year with profit sharing, and potentially more depending on the type of 401(k) plan that’s best for your business.3That means owners can hold onto more of their earnings, which can be invested to grow for years to come.
3. 401(k) Can Help Businesses Attract And Retain Employees
For many employees, a 401(k) isn’t just a perk, but an important benefit that can make the difference between taking one job offer or another. In a 2016 survey, 72% of employees said that 401(k) was the most important financial benefit an employer can offer.4Employees who are satisfied with their 401(k) plan are also more likely to intend to stay with their current employer. Only 25% of small employers offer a 401(k) plan, so taking the initiative to start a 401(k) now can give you an edge over your competition as your small business continues to grow.5
If you are considering starting a 401(k) plan for your business, keep in mind that you don’t have to go it alone. It’s best to start with a 401(k) adviser who can help you take a high-level look at your goals as a business, your employees’ needs, and help you build a 401(k) plan that’s right for you.
Look for a specialized adviser who will act as a fiduciary, sharing in your legal responsibility to make good choices on behalf of the employees who will depend on your new plan.
As you explore retirement benefits for your small business, remember to focus on the needs and expectations of your employees, and also on the ways a 401(k) plan can benefit your business and you personally as the owner. With the right planning, a 401(k) can make it easier to manage tax liabilities, to plan for retirement yourself, and to engage employees into the future.
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