The Frugal Fiduciary Small Business 401(k) Blog
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You’ve been taxed with the responsibility of setting up a retirement plan for your tax exempt organization and now you’re trying to decide between a 403(b) or a 401(k) plan. You’ve Googled, you’ve read, you’ve cringed at the technical language presented to you, desperately trying to understand the differences. Been there, done that.
Ever hear of voluntary 401k contributions? If you are like most people, probably not. They are after-tax employee contributions like Roth deferrals, but subject to different ERISA rules. Voluntary contributions have been around decades longer than Roth deferrals, but are less popular – mostly because their earnings can’t be withdrawn tax-free at retirement like Roth deferrals.
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You’ve made the decision to establish a 401(k) plan for your small business, but you’re concerned inertia or procrastination will prevent employees from using it. You know many workers think “I can’t afford to save much so there’s no point of saving at all” or “it’s OK for me to postpone savings because I’m not close to retirement.” So how do you overcome these mental barriers or otherwise incentivize employees to participate in your new 401k plan? Two ways - education and plan design. Employees are more likely to participate today when they understand the cost of delay and when certain plan features are offered.
Making hasty choices when setting up a 401k can cost your business, or your employees, tens of thousands of dollars in unnecessary plan expenses. For this reason, it’s important you hire a 401k service provider that’s not only reputable, but also consultative. If a provider tells you they can setup your plan in minutes – run. Setting up a 401k plan that matches your company goals simply can’t be done using pre-filled, signature-ready forms.
401k plans offer important tax advantages for small businesses and their employees. If you are a business owner, you should understand these benefits when deciding whether or not to offer a 401k plan to your employees. Too many businesses focus on “what is this going to cost me,” rather than, “what are the benefits?” While we strongly recommend always speaking with your accountant on the topic of taxes, here is a high-level summary of the tax benefits possible by offering a 401k plan.