Benefits of the 401k Retirement Plan for Small Business Employers and Employees




  • — January 2, 2019

    Today’s employees are looking for more than just a salary—they want benefits. Millennials and those from Generation X, especially, are more financially invested in their future than previous generations and are committed to saving for their future.

    A company that wants to both recruit top candidates and keep their valuable employees loyal should consider offering a 401k plan to their staff members. Although this is not a terribly big investment for small businesses, it can go a long way in showing that they care about their team members and their future.

    What is a 401K?

    401k is an employer-sponsored retirement plan, the most popular of its kind in the United States. Employees are able to defer a portion of their salaries to this retirement plan, which is used to invest in mutual funds primarily, as well as stocks and bonds.

    This is a defined-contribution plan where the amount of funds the employees invest and the performance of the funds they invest in determine the balance of the account.

    Although they are not obligated to do so, some employers choose to contribute to the employee’s plan, often matching the contributions up to a specific percentage.

    This plan does come with certain legal limitations, such as an investment cap of $ 19,000 for individuals and $ 56,000 for joint contributions for employers and employees for 2019. Individuals who are 50 years of age or older can contribute an additional $ 6,000 individually and $ 62,000 as joint contributions.

    Another limitation is the ability to withdraw funds from this plan, which is only allowed upon the age of 59 ½, when the employee changes jobs, retires, becomes disabled or passes away. Some plans allow for withdrawal of funds during a certain hardship as well. If the funds are withdrawn prior to the allowable time, the funds will be counted and taxed as ordinary income and will be charged a penalty.

    The plan calls for required minimum distributions (RMDs), which are mandatory withdrawals once the account holder reaches 70 ½ years of age.

    Benefits of the 401k for Employees

    The 401k is qualified by the IRS, so the funds transferred are eligible for tax benefits. The advantages of the 401k for the employees include a tax break on the contributions deferred to the account as well as a reduction in taxable income.

    Let’s say an employee earns $ 10,000 per month, and contributes 5% of that amount to the 401k plan. That monthly $ 500 will be transferred to the retirement account tax free, and the employee’s taxable annual income will be reduced from $ 120,000 to $ 114,000.

    Benefits of the 401k for Employers

    The 401k also offers tax breaks for employers for the contributions they add to their staff’s retirement plans.

    In additional to the financial savings, offering an employer-sponsored retirement plan will help companies attract and retain top talent. In the current climate, where 55 million Americans do not have a retirement savings plan, and the number is larger in employees of small companies, this benefit would be a big advantage for staff members.

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    Author: Robert Gloer

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