What Can You Expect from a 401(k) Plan?

All businesses, including start-ups, entrepreneurs, small to mid-sized companies, and large, well-established businesses, can start a 401(k) retirement plan to enjoy tax benefits and retirement savings.

What is a 401(k) Retirement Plan?

According to plan provider Ubiquity, a 401(k) plan is the best option for a retirement plan that allows both employers and employees to contribute toward their retirement savings. Through a 401(k) plan, you can set aside a small amount from each pre-tax paystub and contribute to a retirement fund. With regular contributions, these savings will grow over the years so that you have a steady fund when you retire. As the contributions made to the 401(k) plan are on a pre-tax basis, you can also enjoy a reduced tax burden in the short team while your assets continue to grow long term in a tax-free environment.

What Are the Benefits of a 401(k) Plan?

Business owners and employees can largely benefit through the 401(k) plan. Some of the key advantages of starting this retirement plan include:

  • Opportunity to save more when compared to IRA or Individual Retirement Account.
  • Owners are allowed to contribute up to 25% of the employee’s salary to their retirement savings.
  • Higher contribution limit for both owners and employees in comparison to a traditional IRA. For example, if you were to contribute $19,000 to a 401(k) plan in 2020, this limit would increase to $19,500 in 2021. In comparison, through an IRA, the maximum contribution limit would remain the same at $6000 for 2020 and 2021.

What Are the Different Types Of 401(k) Plans?

Based on the size of your company and your business needs, you can choose from any of the following 401(k) retirement plans:

Small Business 401(k): This plan allows you to draw money from your pre-tax salary and add it toward your retirement fund, just like any large business 401(k) plan. The small business 401(k) plan provides the same maximum contribution limits regardless of your business’s size. This plan is best suited for individuals or a small business as it is easy to set up, does not demand a lot of administrative time, and does not involve any asset management fees.

Individual 401(k): This plan is specially designed for self-employed individuals or businesses with sole-proprietors. Also known as the solo or self-employed 401(k), the individual 401(k) can be easily managed by an individual and provides the same tax benefits as any other 401(k) plan.

Self-Directed 401(k): This plan offers automated salary deductions and pre-tax savings similar to the traditional 401(k). The only difference with a self-directed plan is that the employee can select where to invest the funds.

SIMPLE 401(k): This plan is a blend of IRA and the traditional 401(k) plan. Like IRA, employers offering SIMPLE 401(k) do not need to worry about the IRS compliance tests. This plan allows both owners and employees to borrow a loan against the retirement funds. The only disadvantage of setting up a SIMPLE plan is that it has lower contribution limits that you cannot customize.

If you plan to set up a retirement plan for your business, ensure to review the terms of each plan before making your selection.