If you’re busy running a small business, you have many demands for your attention. Between clients, employees, profits, sales, marketing — the list goes on and on. You may not have even considered offering a retirement plan for your employees yet. But you might change your mind after reading this article about how they can benefit you as well as your staff.
Retirement Plans Are a Necessity
Most of us don’t want to work forever. The ideal goal is to work hard and save for our future so that we can reap the rewards of our labor. But statistics show that you’ll need about 80 percent of your pre-retirement income to continue your current lifestyle into retirement.
One way of saving for retirement is to just set aside part of your earnings throughout your career. That method works fine as long as you’re consistent with the savings. But most personal savings accounts produce minimal interest on the investments unless you are diligent in researching high-yield accounts. That takes knowledge, time, and energy, which many of us don’t have or have little interest in doing.
That’s what makes company-sponsored retirement plans so attractive to employees. But you may be surprised at the benefits you derive, as the business owner, as well.
Reasons You Should Offer a Retirement Plan
You may think that you have little to gain by offering a 401(k) or other retirement option as part of your company’s benefits package. But there are several advantages for your business in adding this perk. And it will benefit everyone on your payroll, as well as you and your business, even if you have no employees at all.
You’d be wise to consider offering a retirement savings plan because it benefits not only your employees, but you and your business as well.
1. Hire and Retain Top Talent
In order to remain competitive and attract and keep the best employees, salary is not the only consideration. Many employees look at other benefits when they are considering whether to accept a job.
2. Tax Breaks
Your company will receive significant tax deductions by setting up a 401(k) plan. Plus, if you offer a match, your tax breaks will increase. Here’s how it works:
- Employer contributions are deductible from the employer’s income.
- Employee contributions (other than Roth contributions) are not taxed until distributed to the employee.
- Money in the plan grows tax-free.
- Distributions may be eligible for tax-favored rollovers or transfers into other retirement programs.
- Your Money Will Grow
Remember, you reap the benefits of tax-deferred contributions that you make to the plan for yourself too. All retirement plans offer tax-deferred growth on earnings. As an employer, you also benefit from tax-deductible employer contributions. In addition to your plan contributions, the compounding of interest, dividends, and capital gains allows your account to generate earnings on top of earnings.
Types of Retirement Plans for Small Businesses
When you decide to set up a retirement plan for you and your employees, you have a few to choose from. The decision on which one is best for your situation depends on different factors. Listed below are some options to consider. Each has its pros and cons, so it’s wise to consult with a financial advisor before making a final decision.
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan that small businesses can use if they employ 100 or fewer employees. Employers can contribute 2% of the employee’s salary or a dollar-for-dollar matching amount with the employee’s contribution, up to 3% of the employee’s salary. In 2021, the maximum amount employees can contribute is $13,500 annually.
SEP IRA
A simplified employee pension (SEP) IRA can be set up for small businesses or self-employed individuals. It is a more traditional retirement plan similar to a standard IRA, although contribution limits are often higher with SEP IRAs. Contributions are tax deductible and interest earned is tax deferred until retirement.
401(k)
A regular 401(k) retirement plan allows more options for employers and employees can contribute more money to them. The current limit is $17,500 per year. The 401(k) plan is more flexible in terms of eligibility and shorter waiting periods for vesting.
There are two types of 401(k) plans: traditional and Roth IRAs. The main difference is in the way they are taxed. Traditional 401(k)s don’t tax contributions, but they tax withdrawals. Roth IRAs tax contributions but not withdrawals.
Consult with a Financial Advisor
Deciding on whether to offer a retirement plan for you or your business is a very important choice. Don’t make the mistake of doing it on your own.
The professional financial advisors at Nolan Accounting Center have years of experience helping small businesses with their financial decisions. Let us help you determine the best option for your future and that of your employees.