When it comes to the world of finance, from the names to the numbers, it can be both intimidating and confusing. So, how do you decide what is right for you when it comes to investing in the future for both yourself and your employees? While there are a vast amount of options when it comes to investing, many are familiar with the term “401(k)”. It is not uncommon for businesses to offer this kind of plan to their employees. Whether you are the employee or the employer, it is important to understand your options.
In layman’s terms, a 401(k) is a tax-deferred, defined retirement plan. The name 401(k) itself comes from a section of the IRS code. With this form of investment plan, employees are able to contribute to their 401(k) plans by having funds directly withdrawn from their pay. Employers also have the option to contribute to these plans, which can be an incentive for someone choosing to work for you. While the plan itself is fairly simple, there are actually quite a few options when it comes to 401(k) plans. So, how do you differentiate, and decide what plan best fits the needs of your business? There are a few factors about each that you should consider.
Under a traditional 401(k) plan, employees will contribute to their plans, but the money that is added will not be taxed. While it may seem convenient to pay tax later, you may be taking a gamble with what you will have to pay in taxes later on down the road when you cash out. The benefit of a Traditional 401(k) is that there are no minimum contribution requirements for employees or size requirements (for employers).
As an employer, you have the freedom to choose whether or not you contribute. If you decide to contribute, you can match your employees, or contribute even if they choose not to. When you choose this plan, you must maintain a recordkeeping system, develop a plan, and inform your employees.
Not to be mistaken with a Roth IRA, the Roth 401(k) it is actually one of the newer ones out there. It is similar to a Roth IRA in that when the employee contributes money to the plan, they are not able to write the contribution off on taxes. These plans are funded with money that is pre-taxed, so it is taxed on the paycheck then added to the retirement account. The benefit to this is that although your employees pay the tax on it now, they will never have to pay a tax again, no matter how high taxes may rise.
As an employer, if you offer this plan, you must offer a traditional 401(k) as well.
Safe Harbor 401(k)
These plans are popular among small business owners because they do not require nondiscrimination tests, which can save both time and money. As an employer, you are however required to contribute to all employees whether they participate or not. As an employee, if your workplace matches what you contribute, it may be worth setting aside part of your income for this.
While this is only a synopsis of 401(k)s and the different aspects that affect them, it is important to be prepared when it comes to planning your future. Your options may be limitless and understanding how they might impact your future is crucial to decision making. If you would like help to better understand different investment plans, give us a call at (440) 498-8408. Our experienced team of professionals is ready to help you find the best plan for your company.