If you think that 401(k) plans are only meant for large, well-established businesses that have a high capital then you are wrong. Any business right from a small to mid-sized business including start-ups can set up a 401(k) retirement plan and enjoy tax savings and retirement benefits. With this additional help from the experts at Ubiquity, you’ll have a better understanding of good 401(k) plans.
What is a 401(k) plan?
The best option for retirement savings is through a 401(k) plan that provides savings opportunities to both the owners and all the employees. A 401(k) plan works in the sense that you set aside a small amount from your paycheck each time and allow your savings to grow over the years so that you can have an income when you retire or stop working.
Contributions that are made to the 401(k) plan are on a pre-tax basis meaning in the short term you have a smaller tax burden on your annual income while in the long term your investments will grow in a tax-free environment until your retirement.
Benefits of a 401(k) plan
Both employers as well as the employees can enjoy major benefits from a 401(k) plan as mentioned below:
- You can save more through a 401(k) plan rather than an IRA or Individual Retirement Account.
- As the 401(k) plan is set-up by the employer, it allows owners to contribute a maximum of 25% of the employee’s income to the employee retirement savings.
- In comparison to a traditional IRA, a 401(k) plan has higher contribution limits for both employers and employees. For example, if you contribute $19,000 in 2019, then the limit is raised to $19,500 in 2020. However, with IRA, your maximum contribution limit in 2019 and 2020 is still $6000.
Types of 401(k) Plans
Small Business 401(k): Similar to a 401(k) plan for any large business, the small business 401(k) plan allows you to draw money from your pay before taxes and add it to your retirement fund. Regardless of the size of the business, the 401(k) plan provides the same maximum contribution limit. It is best to opt for this plan if you are a small business or individual as it does not have any asset management charges and you do not have to spend a lot of time handling a retirement plan.
Individual 401(k): This plan is also known as the solo or self-employed 401(k) and designed for self-employed individuals or businesses with sole-proprietors. They offer the same tax advantages and savings flexibility as any other 401(k) plan while making it easy to manage for an individual.
Self-Directed 401(k): This plan allows pre-tax savings and automated salary deductions just like the traditional 401(k). The only difference is that in a self-directed plan employee has a choice of where to invest the funds.
SIMPLE 401(k): This plan is a blend of traditional 401(k) plan and IRA. Employers offering SIMPLE do not need to worry about testing their plan to IRS compliance tests similar to IRAs. They allow owners and employees to take a loan against their retirement savings just like the provisions of traditional 401(k) plan and IRA. The only disadvantage of a SIMPLE plan is that it has lower contribution limits and you cannot customize it.
It is recommended to review the terms of each plan before selecting a plan for you, or your business.
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