% Of Small Businesses Add Roth Contributions
Roth contributions allow plan participants to build a tax-free nest egg for retirement. To do so, however, they must pay taxes on these contributions in the year they are made at personal income tax rates. This differs from traditional 401 salary deferrals, which are tax-deductible in the year they are made – and taxed in retirement.
With Roth IRAs growing in popularity, having this as a feature in your 401 may be popular with your employees as well, as people really like the idea of tax-free income during retirement. Its especially popular among younger, lower-earning employees who are early in their careers and expect to be in a higher tax bracket by the time they retire.
Essentially, if employees expect to be making a lot more money down the line, it might make sense to pay income taxes on their employee contributions now while theyre in a lower tax bracket.
Reality: 401 Plan Administration Has Improved A Lot Over The Last Decade
While it used to be that the paperwork from starting a plan can overwhelm business owners, who already juggle many responsibilities throughout their day, thats no longer true.
Small and medium-sized businesses can find what they need: a 401 provider that uses automation to streamline the process of setting up and administering a plan with features like:
Seamless integration with popular payroll providers
Support with compliance testing and filling required IRS forms
Reporting functionality to monitor how employees are using and saving with the plan
Contribute To An Ira First
The reason for the IRA is that you can open a fully self-directed account, with unlimited investment options, and generally with lower fees than an employer sponsored plan will have.
You can contribute up to $6,000 each year, or $7,000 if you are 50 or older for the 2020 tax year. plan, the IRA deduction may be limited based on your income).
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You Can Fund A Roth Ira
A Roth IRA, named after the guy who created them, has a bit of a restriction. You must be making less than $112,000 a year, and if youre married, your combined income must be less than $178,000 a year in order to contribute.
However, the benefit to a Roth is that you dont pay taxes on it when you withdraw your money at retirement-you pay the taxes up front. The annual contribution limit is up to $5,500 a year for a Roth IRA.
Should You Still Invest In A 401 Without A Company Match
The 401 plan may very well be the single best retirement option for the average worker.
If you have a plan available at work, you should absolutely participate in it.
But one of the major reasons people sign up for 401 plans is a company match. Employees see it as a way to enhance their retirement contributions.
Some consider the match so important they may refuse to participate if it isnt offered.
Unfortunately, not all employers with 401 plans offer a company match. But if you work for one of the employers who does not offer a company match, should you still invest in a 401?
The short answer:
Yes, but as a secondary option to your own IRA.
Lets dig into the details of why thats true. Knowing what they are will help you make your decision.
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What To Do When You Dont Get A 401 Company Match
Some employees will decline to participate in a 401 plan if theres no company match. This is generally not a recommended strategy. While the match is a nice benefit to have, its not the primary reason for having a 401 plan.
Even without an employer match, your contribution to the plan is fully tax-deductible in the year taken. That will give you an income reduction for tax purposes of up to $19,500 per year .
But perhaps even more important is the tax deferral of investment earnings. Taking an example of a tax-deferred investment compared with a taxable investment, youll see how important tax deferral is.
Lets say you have two accounts, each with $10,000. Each will earn investment income of 10% per year. The only difference between the two is that one is a taxable account, and the others tax-deferred.
If youre in a combined federal and state marginal tax rate of 30%, a 10% return in a taxable account is reduced to 7%. After 30 years, the account will grow to $76,121.
In the tax-deferred account, income taxes have no effect. Youll earned the full 10% on your investment each year. After 30 years, the account will grow to $174,491.
Do you see the difference? Just as a result of tax deferral, you pick up an additional $98,000 in the tax-sheltered account. And we havent even factored in annual contributions!
This is why you should participate in a 401 plan, even if it doesnt offer a company match.
Whats The Big Deal About A 401 Anyway
Among ways to save for retirement, the 401 plan is the undisputed king. Thats because:
- Employees can contribute with pre-tax dollars, and earnings are tax-deferred
- In 2018, employees can save up to $18,500 in a 401 compared to just $5,500 in an individual retirement account
- There are no income limits for making 401 contributions
- Many employers provide matching contributions
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Reasons To Add A Discretionary Match Feature
- Employees must contribute salary deferrals themselves to receive an employer match. Because few employees tend to leave this free money on the table, an employer match usually increases the salary deferrals made to a 401 plan.
- The ADP test is used to test the salary deferrals made to a traditional 401 plan for nondiscrimination. A discretionary match can help a plan pass the ADP test by increasing salary deferrals. A stretch match can increase salary deferrals even further.
- If your business is a startup, has erratic profitability, or frequently acquires other companies, you may not be in a position to make an employer contribution every year. This isnt a problem with a discretionary match. At the end of each year, you have control over whether to contribute, and if so, how much.
Defined Contribution Pension Plans
In a defined contribution pension plan, you know how much you will pay into the plan but not how much you will get when you retire.
Usually you and your employer pay a defined amount into your pension plan each year.
The money in your defined contribution pension is invested in one or more products on your behalf. You may be able to choose how your money is invested. The amount you get when you retire will depend on how your plan is managed and how these investments perform.
You will usually have to choose where to put the money in your defined contribution pension plan when you retire.
Your options will often be to put your money in:
- an annuity
- a locked-in registered retirement savings plan or locked-in registered retirement income fund
- a combination of these two options
You may be able to take the money from your pension plan in cash if it is below a specific amount. Depending on your age and the terms of your pension plan, you may also be able to reinvest some of this money in another financial plan, such as a Registered Retirement Savings Plan or Registered Retirement Income Fund that is not locked-in.
Your pension plan administrator will usually tell you your options when you retire. You may want to consider speaking with a financial advisor for help deciding how to manage the money from your defined contribution pension plan.
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Plans Are Simple To Set Up And Maintain
Todays web-based small-business 401 programs are designed to be easy for the plan administrator to set up, administer, and maintain. With online setup and management, plan administration requires a minimal time commitment and little to no paperwork. Employees have 24/7 access to their online 401 accounts, and a retirement specialist is just a phone call away.
What Is A 401 Plan
A 401 plan is a type of IRS-approved retirement plan that allows employees to contribute pretax amounts to individual retirement accounts. Employers also can contribute to employee accounts, often by matching employee contributions, up to a certain percentage.
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How Does A 401k Benefit An Employer
Recruit and Retain. In todays workforce, its becoming the norm to expect certain benefits such as retirement and healthcare. From an employers perspective, offering a 401k can give you that extra edge to stand out amongst your competitors. Attractive benefits are now a must.
Incentivize Performance. Employers also have the ability to use retirement perks as incentives. Many organizations tie their contributions to specific goals, and when employees meet these benchmarks they are rewarded by increases in their 401k contribution. Depending on how you choose to structure your benefits program, they can be used to incentivize performance, which ultimately helps the company succeed.
Tax Perks. 401k plans also help the employer come tax season. Matched contributions and administrative work associated with the benefits plan are tax-deductible. Lower your tax burden with a company-wide 401k program.
These three perks are highly beneficial from a production and financial standpoint. Not to mention, a retirement program lets your staff know that you value their financial future. Showing you care can do wonders for company culture.
Feel More Confident With Your Retirement Plan
You offer a retirement planor youre thinking about it. Thats a great thing. But it comes with some questions. You may want help with things like plan compliance and participant engagement.
Thats where we come in. Were one of the leaders for 401 and 403 plans focused on helping you follow retirement plan rules and increase participation and savings rateswhile making your plan administration as efficient as possible.1
Talk to your financial professional about your defined contribution plan options or give us a call at 800-952-3343 to discuss how we can help.
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Offering Retirement Benefits Doesnt Need To Be Complicated
If you run a business youre probably constantly thinking about its financial healthhow much money its earning and spending. But another aspect of financial health that may be of concern is the financial health of your employees, and how to start a 401 for your small business.
Retirement plans can offer significant benefits to your employees and help you offer competitive benefits. But employees of small businesses are least likely to have access to one. Just over half of the small and mid-sized businesses included in a Pew Research study offer retirement plan benefits to their employees.
If youre considering including a retirement plan on your list of benefits, a 401 plan might be your best bet. In this article, well cover different 401 plan options as well as how to get started offering this benefit to your employees.
Disclosing Plan Information To Participants
Plan disclosure documents keep participants informed about the basics of plan operation, alert them to changes in the plans structure and operations, and provide them a chance to make decisions and take timely action with respect to their accounts.
The summary plan description – the basic descriptive document – is a plain-language explanation of the plan and must be comprehensive enough to apprise participants of their rights and responsibilities under the plan. It also informs participants about the plan features and what to expect of the plan. Among other things, the SPD must include information about:
- When and how employees become eligible to participate in the 401 plan
- The contributions to the plan
- How long it takes to become vested
- When employees are eligible to receive their benefits
- How to file a claim for those benefits and
- Basic rights and responsibilities participants have under the Federal retirement law, the Employee Retirement Income Security Act .
The SPD should include an explanation about the administrative expenses that will be paid by the plan. This document must be given to participants when they join the plan and to beneficiaries when they first receive benefits. SPDs must also be redistributed periodically during the life of the plan.
A summary annual report is a narrative of the plans annual return/report, the Form 5500, filed with the Federal government . It must be furnished annually to participants.
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What Do Modern 401 Providers Offer Thats Different From Traditional 401 Providers
Automation that streamlines administration
Robo-advising for employees as well as additional services for onboarding and employee education
Made for small and medium-sized businesses with competitive pricing
Manual process in managing a plan and requires a lot of paperwork
Expensive for small and medium-sized businesses
Experienced they have been in the industry for 10+ years
Now that weve covered traditional vs. modern 401 providers, lets move on to examining six common myths about small business 401s.
How Can I Offer My Employees A 401 Plan
In this edition of Ask the Board, we asked Ben Thomason, executive vice president of revenue at Vestwell, if small businesses are in a position to offer workers a 401.
Vestwell’s Ben Thomason recommends that small businesses consult with an expert and start simple when choosing to offer employees a 401K plan.
If you could create your own fantasy Board of Directors who would be on it? CO connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, a CO reader asks whether it is feasible for a small business to sponsor a 401 plan for employees.
Ben Thomason, executive vice president of revenue at Vestwell, answers
Companies know its vitally important to have the right people on board to build the business, and a solid benefits package attracts the top talent they need. However, many small businesses assume they do not have the option to offer a 401 retirement savings plan.
That misconception is understandable, Thomason told CO, because cost and complexity had once put 401s out of reach for companies with lean resources. Thats no longer the case today, he said, thanks to the emergence of outsourcing options and technology advancements that streamline and ease the burden of 401 setup and administration.
To me, that is the why of offering 401s to attract the right talent so your business can grow the right way, Thomason said. The right people make all the difference.
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Who Oversees Retirement Plans
The IRS qualifies, or approves, plans and regulates them from a taxation standpoint. The U.S. Department of Labor oversees employer-sponsored retirement plans, following the Employee Retirement Income Security Act of 1974 . They deal with fiduciary responsibilities of plan sponsors, participant rights, and the guarantee of benefits.
Group Registered Retirement Savings Plans
A group Registered Retirement Savings Plan is a retirement savings plan sponsored by your employer.
You open an individual RRSP but pay into it through your employer. You contribute through regular deductions from your paycheque. Your employer may also contribute to your RRSP on your behalf.
The details of group RRSPs vary by employer. For more information on your Group RRSP, talk to your human resources or pension plan representative.
What Are The Maintenance Costs For Setting Up A 401
Once you establish a 401, your business will have ongoing costs in the form of administrative fees and any matching contributions. Fees generally fall into three categories: day-to-day operations, investment fees, and individual service fees.
There are also potentially fees or penalties associated with being non-compliant with regular 401 benchmarking, which you’ll want to avoid at all costs. A few examples of 401 penalties include:
- Non-compliance with ERISA for failing to meet certain filing and notification requirements
- Failing to file Form 5500 with the IRS each year
- Not providing 402 notices to plan participants who are seeking distributions from their retirement plan accounts
One way to avoid fines and penalties is working alongside a knowledgeable retirement services provider that can help ensure compliance when it comes to retirement plan forms, deadlines, and notifications.
Benefits To Your Business
Your employer contributions are a deductible business expense, which reduces your business taxes.
Your business can get tax credits and other incentives for starting a plan. The tax credit is for employers with 100 or fewer employees, and is applied to 50% of your eligible startup costs for a 401, up to a maximum of $500 a year. The credit is given for setting up and administering the plan and educating your employees about it.
Beyond that, offering a retirement plan is attractive to current and potential employees, giving you a competitive advantage when hiring and retaining talent.
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How Much Does It Cost To Set Up A 401 For A Small Business
Costs to set up a 401 plan will vary depending on the size of your business and the types of benefits you select. Initial setup fees can generally run anywhere from $500 to $3,000, depending on the chosen retirement service provider. Other costs to consider are fees associated with rolling assets over from another plan and initial consulting costs for investment advice.