With the average Social Security check just $1,404 per month in 2018, starting a small business 401(k) retirement plan is a great way to help your employees secure their financial future. It also increases employee loyalty by demonstrating that you care about your worker's financial well being. Another big benefit is that a small company 401(k) offers tax advantages for both you and your employees.
The idea of setting up a small business retirement plan can be a little intimidating. One way to make sure it is all done correctly is by hiring a 401(k) company to administer the plan. This is because 401(k) companies know the ins and outs of these plans, and they know the tax benefits.
Here are just two of these benefits that employers enjoy.
Tax Savings Usually Pay for More Than the Cost of the Plan
The cost of a 401(k) plan depends on a number of factors but can often be as little as $1,000. Now think about the taxes you can save by contributing to a 401(k) plan. In 2018, you yourself as an employee can contribute up to $18,500 tax-deferred and up to $24,500 tax-deferred if you are age 50 or better ($500 more than in 2017). If, for example, you are 40 years old, in the 24% tax bracket and contribute the full $18,500 to your retirement account, then you can save roughly $4,440 in taxes. This more than outweighs the cost of the plan's administration.
Receive a $1,500 Tax Credit
Uncle Sam likes 401(k) plans and wants you to start one. If you do and it is the first one your company has set-up, then you can qualify for a $500 tax credit for each of the plan's first three years. This $1,500 over three years can help cover the plan's administrative costs.
Keep in mind that the tax credit is equal to 50% of the 401(k)'s administration and set-up fees with a cap of $500 per year. To qualify for the credit, your company has to have at least one employee besides you and that person has to earn less than $120,000 per year.
Employee retirement plan tax advantages are also enticing. Here are just a couple.
Reduce Taxable Income
The money that workers contribute to their retirement plan grows tax-free. This is because the plan contributions are taken out of their paycheck before federal and state taxes are withheld. This lowers their taxable income and therefore lessens their tax burden. For example, if an employee earns $30,000 per year and contributes $2,000 to his 401(k) account, then his taxable income becomes $28,000 and he pays less tax.
Reduce Taxes During Retirement
The whole idea of a small business retirement plan is to make sure that workers have the money that they need when they stop cashing a paycheck. A 401(k) plan does this by stashing away money tax-free, but it also does it by ensuring the employees pay less tax during their golden years.
This is because when workers do withdraw the money in their 60s, 70s and beyond, the chances are high that they will be in a lower tax bracket than they were during their employment years. This means that they pay less tax on the money they earned than they would have while employed.
So a small business retirement plan benefits both employers and employees. It does so not just by ensuring that there will be money to supplement Social Security but by helping save on taxes now and down the road. Hiring a 401(k) company helps guarantee that your company receives all of these 401(k) tax benefits. If you are thinking that it is time for a 401(k) for your small business, then talk to a plan provider firm to see what it can do for your company.