File this under holidays you might not know about: The Friday after Labor Day is 401(k) Day, which means it’s coming up on September 6, 2024.
However, many small business owners focus on retirement planning year-round, not just one day. Retirement plans promote financial security and freedom, so it’s wise to start planning and saving now to meet your retirement goals.
What does a 401(k) look like for a small business owner, and why do you need one? Let’s dive into everything you need to know about 401(k) plans.
Understanding 401(k) Plans
A 401(k) is a retirement savings plan that allows employees to contribute a portion of their salary and wages. Employees can choose how much money they want to defer from their salary to send to their 401(k) before taxable income is calculated.
Employers can contribute to their employees’ accounts, and many choose to match employees’ contributions up to a certain percentage. Because of their tax benefits and relative simplicity, 401(k) plans are a popular retirement option, and more than 70 million Americans have an account.
Do You Need a 401(k) as a Small Business Owner?
When most people think of a 401(k) plan, they think it comes from a large employer that may match an employee’s contribution. However, there are many benefits to having a 401(k) plan for small business owners, even if you’re a sole proprietor.
Here are four key reasons to have a 401(k) as a small business owner:
- Tax advantages. 401(k) plans are designed to help you plan for your future. Because your 401(k) deductions are made with pre-tax dollars, any amount you contribute to your plan lowers your taxable income — meaning you’ll owe less in income taxes. Contributing to a 401(k) is a win-win, especially compared to other retirement plans that contribute post-tax dollars.
- Funds are accessible. Unlike many other retirement and savings plans, you can access your money via a 401(k) loan if you need it with no penalty or high interest rates. A 401(k) is a fairly low-risk savings option because it can help you in retirement or act as an emergency savings plan without penalties.
- Money is protected from bankruptcy. Any funds added to your 401(k) account are typically protected from creditors and bankruptcies, adding another layer of protection between your personal and small business finances.
- Helps attract and retain talent. Offering retirement benefits is an effective way to bring in great talent as you grow your business. If a potential employee is choosing between your company that offers a 401(k) and another that doesn’t, those retirement offerings create a competitive advantage. People who maintain a retirement plan have increased job satisfaction and commitment and are more likely to be productive, motivated, and efficient at work.
3 Steps to a Successful 401(k)
Interested in setting up a 401(k) plan but don’t know how to start? Rest easy — there are plenty of resources to help you choose, open, and maintain your retirement plan, even without an HR or administrative team. Depending on the size of your business, you can set up an employer 401(k) or an individual 401(k).
Set Up
Establishing a 401(k) for your small business requires four steps:
- Adopt a written document. You can hire someone to write the document for you or work with a retirement professional. This document outlines the details of the plan and is legally binding.
- Establish a trust for the plan’s assets. The assets of the 401(k) must be protected in a trust. This step involves setting up a trust and selecting a trustee.
- Create a recordkeeping system. This system tracks the contributions, earnings, and distributions of the 401(k) plan. You can work with an administrator or financial institution to manage this process.
- Provide information about the plan to employees. Notify eligible employees about the 401(k). If you are a sole proprietor, this simply means notifying yourself.
Manage
Once the 401(k) plan has been established, many small business owners turn over the day-to-day management, which includes tracking contributions, earnings, and distributions to a system administrator, financial institution, or software platform.
Contribute
Then, the most important part: contribute to your 401(k). The IRS caps the annual contribution to a 401(k) at $23,000 or $30,500 for people age 50 or more.
Resources for Small Businesses
Just because you own a small business doesn’t mean you should miss out on important retirement benefits like a 401(k) plan. Take advantage of resources available to help in the set-up process or to answer questions.
- The U.S. The Department of Labor offers many resources and guides for small business owners.
- Investment companies offer 401(k) plans for all sizes of businesses and can answer questions and provide services (often at little or no cost) to small business owners.
- The IRS also provides resources for all types of business owners, including guides on the tax advantages.
Don’t wait to plan for retirement. Take advantage of the many benefits of a 401(k) plan by creating one for your small business.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.