Two-thirds of small businesses are still lacking when it comes to offering retirement benefits to their employees, according to the 2023 Fidelity Investment’s Small Business Retirement Index.
This discrepancy is a great opportunity for you to start a 401(k) plan and be more competitive in building a sustainable, thriving business.
Here at Consolidated Planning, we understand what it takes to help you adequately protect, grow, and ultimately exit your business how you envision it.
In what follows, we’ll share four benefits of the 401(k) and how you can grow your business by implementing a 401(k) plan for yourself and your employees.
Benefits Of The 401(k) For Business Owners
While a 401(k) plan can help you attract and retain top talent, there are reasons to consider this plan that extend beneath the surface.
#1 Employees Expect A 401(k) Plan Option
For today’s business owners, certain benefits seem to be the BARE minimum for entry when you’re hiring people. This is even more true if you’re not a start up and you’re not offering benefits in the form of stock options, for example.
A 401(k), or another retirement account such as a SIMPLE IRA, is the bare minimum you should be offering to your employees. Employee’s not only appreciate but expect an employer sponsored retirement plan.
According to a 2023 Bankrate poll, 32% of U.S. workers say they would need more than $1 million in retirement funds to retire comfortably. And to be honest, your employees will likely need more than that depending on their lifestyle and life expectancy.
The good news for you is if you don’t have a retirement plan set up yet, the SECURE Act makes it very cost effective for you to do so with tax credit incentives.
#2 ROTH Option For Employee Deferral
Compared to a Simple IRA, which is a collection of individual retirement accounts at a business, the 401(k) has higher deferral limits for the employee’s contributions. But, that’s not what makes this option stand out for business owners.
Inside your 401(k), you can have a ROTH option for your employee deferral. This means you can put your entire $23,000 for 2024 into a ROTH account inside your 401(k). Normal limits for an IRA contribution are $7,000.
More importantly, there are no income limitations when it comes to ROTH contributions on the 401(k). With a Roth IRA, you earn yourself out of the ability to do this once you’re over a certain income amount. For a single tax filer this is only between $146,000 to $161,000 for 2024.
The ROTH 401(k) skirts this issue.
As a business owner, you’re not likely to ever find yourself in a lower tax bracket than you were last year, as earning less over time typically isn’t your goal. The hope is every year you’re earning more and more. Paying taxes on contributions at today’s rates is beneficial to anyone who expects to retire in a higher income tax bracket than they are currently paying.
#3 Loan Provision
When designing your 401(k) plan, you can elect a loan provision. This provision allows participants to borrow the lesser of $50k or half of the vested balance from the account. Loans are paid back with payroll deduction on an after tax basis.
Is this the first place your employees should look when they need cash? No. But, is it better than raiding their IRA and paying full freight income tax and penalty tax? YES. Plus, interest paid back on the loan is credited to the participant’s balance.
#4 Buy Life Insurance Within The 401(k)
During plan design, you can opt to allow life insurance to be owned inside of your plan. This is as simple as checking a box. This allows yourself and your employees to purchase life insurance inside of your account..
Utilizing pre-tax dollars to pay life insurance premiums, particularly during the early years of a contract, is a great way to utilize retirement dollars that may not actually be necessary for funding retirements. Ordinarily, if you try to deduct premiums you’ll have an issue. Here, you’re not deducting premiums, you already received the deduction for the contribution and you’re using those dollars to pay the life insurance.
With this set up, the 401(k) owns the life insurance contract and you have a few options as the business owner:
- Assign the death benefit to your business for key person insurance or buy/sell insurance, or
- Sell the life insurance contract from the 401(k) to a trust in order to get the policy out of the plan and possibly your estate. This is a great way to use pre-tax dollars to fund early policy years and then once cash values start to increase, move the policy into a different ownership shell.
Though the ability to buy life insurance in your 401(k) isn’t an immediate benefit during start up, it will be in the future. Remember, your start up plan won’t be a start up forever.
Grow Your Business By Offering Your Employees A 401(k) Plan
Of the two-thirds of business owners who don’t have a retirement plan in place, according to the 2023 Fidelity Investment’s Small Business Retirement Index:
- 48% say they do not believe they can afford one
- 22% are too busy running their company to focus on it, and
- 21% say they don’t know how to start the process of offering a retirement plan.
While these are all valid reasons, the benefits of offering a 401(k) plan drastically outweigh the hesitations you likely have.
Better yet, if you do have a plan in place and are looking to transition to a 401(k), conversions from a Simple IRA to a 401(k) no longer have to take place in January. You’re now able to convert the Simple IRA and make the change to a 401(k) option today.
For a deeper look at the setup, administration, and management of a 401(k) plan in your business, talk with an experienced planning professional at Consolidated Planning.
2024-171771 Exp. 3/2026
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Mike Dare and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
