Employers – Did you know any size business can offer a 401(k) — even self-employed?
The biggest obstacle holding small-business owners back is the idea that their business is too small to qualify for a 401(k) plan. More than half (59 percent) of small-business owners believe this, and the percentage jumps to 67 percent among owner-only businesses. It's simply not true. Whether you are owner-only and are opting for a solo-401(k), have a handful of employees, or operate with dozens of people, you can qualify for a solo, or group 401(k) plan.
Sixty-one percent of small businesses have four or less employees, according to the recent CNBC/SurveyMonkey Small Business Survey. Only 22 percent of small businesses have 10 employees or more.
To match or not to match — you get to decide. Plan matching is another common misconception surrounding 401(k)s. Nearly a quarter of small-business owners — 22 percent — decline to offer 401(k)s because of concerns over affording employer-matching contributions. When offering a 401(k), small-business owners are not required to match employee contributions. You can still offer your employees the retirement benefit of a 401(k), while opting out of the match.
At the end of the day, the decision to offer retirement benefits for employees is a choice for small-business owners. By educating yourself and understanding the myths and misconceptions, you can position yourself to make an informed decision that helps you be retirement-ready, able to better manage taxes and is good for your employees and your company's bottom line.
Employees – Do you know why a 401(k) is such a good deal?
Two main reasons: You get tax breaks, plus - in some cases - a bonus from the boss, known as a matching contribution.
First of all, money you deduct from your paycheck and invest in a defined contribution plan is pretax money. That means it's taken out of your paycheck before your income taxes are calculated. (This is not the case with Roth plans, which work differently.) That means that your contributions effectively lower the amount of income you get taxed on.
Second, as long as your money stays in the plan, you won't pay a penny in tax on your investment returns. All the money you invest compounds year after year without any tax bill from Uncle Sam - at least until you're ready to retire.
Distributions from a traditional 401(k) plan are taxed as ordinary income upon withdrawal. Withdrawals prior to age 59 may result in a 10% IRS penalty tax in addition to current income tax. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific situation with a qualified advisor.