Small Businesses Catching On To Benefits Of A 401(K)
5 tax-specific benefits that make the 401(k) a smart choice for any small business.
1. Tax credits make it easy to get started: Businesses with fewer than 100 employees, but at least one besides the owner, qualify for a $500 tax credit to offset the administrative costs of the plan for each of the first three years, providing a cumulative savings of more than $1,500 to each business.
2. A tax shelter of $15,500, plus any matching: This amount is three times greater than what can be expected from a traditional IRA and also allows for a catch-up of an additional $5,000 for individuals 50 and older. Businesses that choose to match their employee’s contributions also gain additional tax-deferred savings on those amounts and can deduct matching from their company’s taxes.
3. Self-employed workers can shelter up to $46,000 annually: The Solo 401(k) is a great option for one-person businesses as it allows participants to: contribute $15,500 to their plan, and make additional employer contributions that defer up to $46,000 based on the amount they earn.
4. Profit-sharing that provides flexibility: A 401(k) can make it easier for employers to share their success with employees when they have good years and to a lesser degree or not at all during the lean ones. As an added benefit, profit-sharing is typically tax deductible up to 25% of the amount each business contributes.
5. New Roth 401(k) feature allows for after-tax contributions: That’s right. New regulations now enable small businesses to make after-tax contributions with no income level restrictions–unlike the popular Roth IRAs that have income limits that restrict eligibility. This means that employees with a Roth 401(k) will have the advantage of tax-free withdrawals, earnings and all, when they use these funds in retirement. Employers can choose to put all, part or none of their personal contributions into their Roth. The caveat here is that any company match you do must be made on a tax-deferred basis and not into your Roth.
Don’t let 2008 deadlines sneak up on you. To ensure maximum tax benefits in the year ahead, it pays to get started sooner than later. With that in mind, there are a couple important 401(k) deadlines to be aware of.
If you have employees and are willing to provide matching contributions, the “Safe Harbor” deadline is Sept. 15. A safe harbor match provides the best of both worlds: the ability to contribute the maximum allowed to your individual account and to avoid the time and hassles of government plan testing. Businesses not interested in matching or those that are self employed have until December to get set up.
While worrying about money is a year-round experience for most small-business owners, this time of year provides the perfect opportunity to alleviate some of the stress associated with taxes. Before businesses close their books on another tax season, they should take a look at some proactive ways to be better prepared for next April 15. A 401(k) is one way they can put their money to work for them. It’s a small investment in time that can pay big dividends now and when they retire.
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