Shorten Or Eliminate The Waiting Time For Enrollment
Many companies have a waiting period before an employee can enroll in its retirement savings plan. By shortening the waiting period or eliminating it you make it easy for employees to commit to your program.
Need help managing your retirement savings plan or payroll? Fastpay Payroll Solutions has solutions that automatically redirect and calculate employee contributions.
Pick Your Investments And Review Fees
- Stock funds. Your options here may include companies of different sizes or from different geographic regions .
- Bond funds. Options might range from funds representing a large portion of the bond market to specific regions.
- Target-date retirement funds. These are made up of a mix of investments that changes over time, depending on when you plan to retire.
When selecting investments, also known as determining your asset allocation, you have two options: The do-it-yourself route, in which you select individual investments from that list of funds, or the hands-off approach of allocating all your funds into one already-mixed target-date fund. Regardless, the goal is to have a variety of assets to balance out potential risks, what’s known as diversification.
If you take the DIY approach, you’ll need to decide what portion of your portfolio is invested in bonds versus stocks. The Baltimore-based money managers at T. Rowe Price suggest these goals:
- 20s and 30s: 90% to 100% in stocks , with up to 10% remaining in bonds.
- 40s: 80% to 100% in stocks, with up to 20% remaining in bonds.
- 50s: 60% to 80% in stocks, 20% to 30% in bonds, and up to 10% in cash.
- 60s: 50% to 65% in stocks, 25% to 35% in bonds, and 5% to 15% in cash.
How To Set Up A Small Business 401
Offering a 401 plan can make small business hiring more competitive and incentivize employees to stick around. Heres what you need to know about setting one up.
From identifying which type of plan to offer to researching the various financial institutions that provide them, there is some research that goes into offering a 401.
No matter the size of your company, employee retirement plans are important for attracting and retaining talented workers. Types of employee retirement plans can vary from Individual Retirement Accounts to profit-sharing plans to 401 plans.
Offering a 401 has become a much more popular option for small businesses over the years because financial institutions have made them easier to set up and manage. Additionally, it can provide tax advantages for both you and your employees.
Heres what you need to know about setting up a 401 for your small business.
Read Also: Can I Borrow From My Solo 401k
Alternatives To A Solo 401
There are basically two options in addition to the solo 401 for freelancers and independent contractors who want to save for retirement and get the tax advantages that go with these IRS-approved choices:
- The , for Simplified Employee Pension, is designed to be an easy, flexible option for small businesses with employees. It works much like a traditional IRA but has higher contribution limits. The limits are the same as for the Solo 401: $58,000 for 2021 and $61,000 for 2022. However, your contribution cannot exceed 25% of your net adjusted income. You may not find that adequate for your goals. No catch-up contribution is allowed for those age 50 and older. No Roth option is available. A SEP IRA can be opened through any brokerage or bank.
- The Keogh Plan is open to sole proprietors, partnerships, and limited liability companies and is often used as a profit-sharing vehicle for professional practices such as doctors’ and lawyers’ groups. It has the same contribution limits as the SEP IRA and the Simple 401 but poses a greater administrative burden. There is no Roth option.
Another option, the SIMPLE IRA, is designed for businesses with 100 or fewer employees. It is open to sole proprietors but has a lower contribution limit than the Solo 401 or the SEP IRA. The maximum contribution is up to 3% of salary plus $13,500 in 2021 (rising to $14,000 in 2022. There is no Roth option.
How To Set Up A 401 Plan For Small Business
Some employer responsibilities come with setting up a 401 plan for a small business. You might be met with some fees for establishing the plan.
Establishment fees can range from $1,500 $3,000 but could be more or less depending on the business. Some companies might be able to get the fee waived, but this is typically reserved for large businesses.
To set up a 401 plan, there are different steps you need to follow:
Recommended Reading: Can You Leave Money In 401k At Your Old Job
How Much Should An Employer Contribute To The Plan
The amount you as an employer decide to contribute is entirely up to you. As you make this decision, consider the tax savings you can receive for making employer contributions. Employer matches are tax-deductible on federal corporate income tax returns, and some administrative fees associated with managing a 401 plan are tax-deductible as well.
You can match as much as you want as long as it stays within the IRS limitations, which combine both employer and employee contributions. According to the IRS, this combined total is the lesser of 100 percent of an employee’s compensation or $61,000 for 2022, not including “catch-up” elective deferrals of $6,500 for employees age 50 or older.
Also consider factors such as the positive impact a matching contribution can have on employee morale and worker retention strategies. Given the steep costs of hiring and training new employees, an employer match offers the opportunity to truly invest in your workforce. These considerations may help guide your decisions about how much to contribute to the 401 plan.
Is It Worth Having A 401 Plan
Generally speaking, 401 plans are a great way for employees to save for retirement. They make it easy to save because the money is automatically deducted. They have tax advantages for the saver. And, some employers match the contributions made by the employees.
All else being equal, employees have more to gain from participating in a 401 plan if their employer offers a contribution match.
Also Check: Can My Wife Get My 401k In A Divorce
What Does A Good Combination Retirement Strategy Look Like
The earlier you can start saving for retirement, the better, but when you start, saving a lot of money in both a 401 and a Roth IRA might not be feasible.
Start by maxing out a Roth IRA while you are in your 20s, and if there is a company 401 as well, contribute just up to the amount you need to get your employers match, Whitney says.
As your income rises, saving on income taxes might become more important to many households. At that point, contributing more aggressively to a 401 account should become more attractive.
Planning your strategy this way allows you to end up with both types of accounts in retirement that have been growing for years.
A Brief History Of The 401
Why is it called a 401? Despite their popularity today, 401 plans were created almost by accident. It started when Congress passed the Revenue Act of 1978, which included a provision that was added to the Internal Revenue Code â Section 401 â that allowed employees to avoid being taxed on deferred compensation.
In 1980, benefits consultant Ted Benna referred to Section 401 while researching ways to design more tax-friendly retirement programs for a client. He came up with the idea to allow employees to save pre-tax money into a retirement plan while receiving an employer match. His client rejected the idea, so Bennaâs own company, The Johnson Companies, became the first company to provide a 401 plan to its workers.
In 1981, the IRS issued new rules that allowed employees to fund their 401 through payroll deductions, which kickstarted the 401âs popularity. Within two years, nearly half of all big companies were offering 401s or were considering it, according to the Employee Benefits Research Institute.
Recommended Reading: How Much Can I Take From 401k For Home Purchase
What’s So Great About 401 Accounts
A 401 is a popular type of employer-sponsored retirement plan that’s available to all employees 21 or older who have completed at least one year of service with the employer, usually defined as 1,000 work hours in a plan year. Some employers enable new employees to join right away, even if they haven’t met this criterion yet.
In 2021 you’re allowed to contribute up to $19,500 to a 401 or up to $26,000 if you’re 50 or older. In 2020, those amounts rise to $20,500 and $27,000. These limits are much higher than what you find with IRAs, and they enable you to set aside a fairly large sum annually.
Most 401s are tax deferred, so your contributions reduce your taxable income each year. You must pay taxes on your distributions in retirement, but you may be in a lower tax bracket by then, in which case you would save money. Some employers also offer Roth 401s. You pay taxes on contributions to these accounts now, but you’ll get tax-free withdrawals in retirement.
Some employers also match a portion of their employees’ 401 contributions, which can make the task of saving for retirement a little easier. Each company has its own rules about matching, so consult with your HR department to learn how yours works.
Eventually You Must Withdraw Money From A 401
Uncle Sam won’t let you keep money in the 401 tax shelter forever. As with IRAs, 401s have required minimum distributions. You must take your first RMD by April 1 in the year after you turn 72. You will have to calculate an RMD for each old 401 you own. Once you’ve determined the RMD, the money must then be withdrawn separately from each 401. Note that unlike Roth IRAs, Roth 401s do have mandatory distributions starting at age 72.
If you hit that magic age, you are still working, and you don’t own 5% or more of the company, you don’t have to take an RMD from your current employer’s 401. And if you want to hold off on RMDs from old 401s and IRAs, you could consider rolling all those assets into your current employer’s 401 plan.
You May Like: Can I Use 401k Money To Start A Business
Who Can Participate In The Plan
In general, employees who are aged 21 or over who have completed one year of service can enroll in the plan. You cant exclude an employee because he or she has reached a specified age.
The IRS sets restrictions to make sure that retirement plans benefit all employees, not just highly compensated employees such as company executives, owners, and high-earning staff members. The IRS defines HCEs as those who:
- Owned more than 5% of the interest in the business the previous year, or
- Received compensation during the preceding year of more than a specific amount .
Youll see restrictions in the plan documents in various places that limit participation by well-compensated employees. For example, employee and company matching contributions for HCEs must be proportional to those for other employees. You can participate in your companys 401 plan as an owner, with some caps on the amount you can contribute each year.
If you have no employees and are the only person in your business, you might be able to qualify for whats known as a Solo 401. It allows a one-owner business to contribute to the plan. You may be able to contribute as both an employee and an employer.
Read more from the IRS about one-participant 401 plans.
Is A 401k Right For Your Business
When it comes to retirement plans, there are a lot of options. You can choose from a number of different plans if you want to offer retirement benefits to your employees. Here are some of the most popular options:
Traditional 401: The traditional 401 is a retirement plan that offers flexibility. It is available to businesses of any size and allows employers to contribute to employees plans, match contributions, or do neither. There is annual testing that is required for these plans, to ensure that the benefits are equitably offered to all employees.
Safe Harbor 401: Under a safe harbor 401 plan, businesses will have less flexibility but wont be subject to the annual testing requirements that they would be with a traditional 401 plan. A notable feature of the safe harbor plan is you are required to make employer contributions and they vest immediately when they are made.
One-participant 401 Plan: Also known as a 401 plan, a one-participant 401 plan is available to business owners with no employees, aside from their spouse. It comes with the same contribution limits and similar filing requirements as a traditional 401 plan. However, if the plan has less than $250,000 in assets, youre likely exempt from the annual filing requirements.
Read Also: Can I Use My Fidelity 401k To Buy Stocks
Is There A Roth 401 Option
Some plans allow you to contribute to both traditional and Roth 401s. A traditional 401 offers you a tax break now by letting you contribute pre-tax money. But you pay taxes when you withdraw the money. Roth 401s work in reverse: You contribute after-tax dollars but generally dont have to pay federal taxes when you withdraw the money in retirement. Putting some contributions into a Roth 401 may benefit you if you expect to be in a higher tax bracket in retirement. A tax professional can help you figure this out.
You Get A Tax Break For Contributing To A 401
With its name derived from the tax code, the 401 is an employer-based retirement savings account, known as a defined-contribution plan. You contribute pretax money from your salary, which lowers your taxable income and helps you cut your tax bill now. For instance, if you make $4,000 a month and save $500 a month in your 401, only $3,500 of your monthly earnings will be subject to tax. Plus, while inside the account, the money grows free from taxes, which can boost your savings.
Also Check: What To Do With 401k When You Retire
To Roll Over Other Plan Assets
If you already have a retirement savings plan for your business, you may be able to roll over or transfer existing plan assets to a Self-Employed 401. Consult with your tax advisor or benefits consultant prior to making a change to your retirement plan.
Assets from the following plans may be eligible to be rolled over into a Self-Employed 401:
- Profit Sharing, Money Purchase, and 401 plans
Difference Between A Simple 401 And Traditional 401
A SIMPLE 401 is similar to a regular 401 in terms of tax benefits money is invested pre-tax, meaning the full value of each dollar goes into an investing portfolio.
However, a SIMPLE 401s contributions are fully vested, whereas regular 401s might not have full vesting until a future date. This can be great for individuals who might not be at a job long-term but still want to take advantage of an employer-sponsored retirement plan.
Additionally, SIMPLE 401s are held under less regulatory scrutiny than regular 401s and are only permitted for businesses with 100 employees or less. This reduced regulation makes them less expensive for employers.
Also Check: How To Rollover 401k To Ira Td Ameritrade
S To Set Up A Solo 401
There are specific steps that must be taken to properly open a solo 401 plan, according to the Internal Revenue Service .
First, you have to adopt a plan in writing, making a written declaration of the type of plan you intend to fund. The choices are the same as are given to an employee opening a 401 plan: you can choose a traditional 401 or a Roth 401. Each has distinct tax benefits.
A solo 401 must be set up by December 31st in the tax year for which you are making contributions.
Your Company May Match Your 401 Contribution
Many employers will help you save in your 401 by matching an employee’s contribution up to a certain percentage, perhaps 50 cents for every dollar you contribute up to 6% of your pay. Be clear on what the company’s formula is.
Some companies will provide contributions to employees’ accounts, regardless of whether employees contribute their own money. And some employers may provide the match in company stock. Whichever way the company helps you save, ask whether there is a vesting schedule for that employer-provided money. You may have to work for the company for a certain amount of time before that money becomes 100% yours.
How To Open A Solo 401
You can open a solo 401 at most online brokers and traditional brokers or directly through a financial services company. You’ll want to do some research ahead of time to identify the best solo 401 company for you.
You’ll need an employer identification number to get started with the enrollment process. If you don’t have one already, you can apply online directly to the IRS.
The rest of the documentation will be provided by the broker or financial services company you choose for the account.