Saturday, March 5, 2011

Is My Business to Small for a 401(k)?

An assortment of United States coins, includin...Image via WikipediaI stop in at from time to time to see if Steve Forbes is making any money and check out the headlines. This time I see they have added a new blog called "Down the Road". It's written by Stuart Robertson, general manager and principal at ShareBuilder Advisors, LLC, a subsidiary of ING DIRECT. Stuarts blog will cover ideas that can help small and mid-size businesses save for retirement and save on taxes too. 

His latest post concerns the common myths associated with 401(k)'s for small business. He estimates only 15-20 percent of small businesses have a retirement plan. He says there is a general perception of these retirement plans that are mostly wrong.

Myth #1 As a small business, we don’t have enough employees: Actually, any size business can have a 401(k), even the self-employed. Any owner-only business can qualify for a type of 401(k) often referred to as an Individual 401(k) or Solo 401(k).

Myth #2 We can’t afford to offer a company match: No worries as matching is not required when offering a 401(k) plan. Not matching can reduce the amount higher earning employees including the owner can contribute to their 401(k) account (below the $16,500 2011 limit), but that’s about it. Still, matching is making its way back as many larger companies are re-adding matches as the economy picks up.

Myth #3 The tax benefits just aren’t that big of a deal: In reality, the tax benefits of a 401(k) can significantly improve a business owner’s tax situation. There are several unique advantages that can make a real difference. Let’s break them down:

  • Saving limits are higher versus most any other retirement tax advantaged option. In 2011, individuals can contribute up to $16,500 tax-deferred as an employee ($22,000 if 50+ years of age) plus receive employer contributions up to $49,000 limit or $54,500 if you are 50+. These limits are inclusive of both employee and employer contributions.
  • When a small business starts its first 401(k) plan, the business can receive a $500 IRS tax credit each year for the first three years (assumes you have less than 100 employees and $1,000 or more in costs. Sorry, solo(k) plans don’t qualify for this credit);
  • Any employer contributions to a 401(k) (match or profit share) is deductible for the business; and

Myth#4 401(k)s are too hard to administer: Setting up a 401(k) plan is now probably easier to setup than your voice mail. How does 20 minutes of online setup and 5-10 minutes each payroll thereafter sound? Online and paper-free is not only easier, but also simpler to manage.

Myth# 5 01(k)s are just too darn expensive: Not any more. Companies can get set-up at a fraction of the cost from what they might think. Couple that with the tax credits offered by the government mentioned earlier and the tax-deferred savings that can help pad your nest egg and the plan nearly pays for itself.

There are probably other myths to conquer but these are enough to conclude that a 401(k) is right for your small company. If you have one for one company please relate the experience to us.

1 comment:

  1. Dave, retirement savings are the easiest way to build wealth. If the employer doesn't offer a 401(K), every employee should have their own IRA or Roth IRA!!!


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