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Should I Set Up a Traditional 401(k) for my Business?

When you are a small business owner interested in offering a retirement plan for your business you have plenty of options to choose from. 401(k) plans are one of the many ways in which small business owners can help themselves and their employees save for retirement.

However, 401(k) plans are not the right answer for every employer, nor are they ideal for every employee.

Is a 401(k) plan right for your business? Consider the following factors when reviewing your company’s retirement benefits package.

How Many Employees Does Your Business Have?

The good news is there are plans for business of every size. If you have employees, consider if you are willing to contribute to your employees’ accounts. Employer contributions are tax-deductible from current taxes; some plans give more flexibility than others in regards to these contributions while others do not require an employer contribution at all.

What are Your Primary Goals?

When you consider offering a retirement plan for your employees, it’s important to think about what you would like to accomplish and what is most important to you.

Are you looking for a retirement plan that allows for flexibility in plan rules and employer contributions? You may find that that a 401(k) plan meets your needs, since this plan allows you discretionary employer contributions, as long as they fit within certain parameters. 401(k) plans also have higher contribution limits than many other plans and can be a great fit if your goal is to save as much as possible for your own retirement.

If your main priority is finding a retirement option that is easy to set up and administer, a 401(k) plan may not be the idea retirement option for your employees. Depending on the number of employees you have, how much they earn, and the contributions you’d like to make, you may consider a SIMPLE IRA or SEP IRA as alternatives.

Have You Considered Alternative Retirement Investment Options?

Even if you think that a 401(k) plan is the ideal investment option for your business, you may want to consider other retirement investment options before making a final decision. Here are some other retirement options you might want to think through:

  • Solo 401(k) – Easier to set up than a 401(k) plan and can be ideal for a solo entrepreneur; contributions cannot exceed the lesser of 100% of compensation or $56,000
  • Defined Benefit Pension Plan – Can be flexible for the older solo business owner or employer who wishes to contribute a mandatorily set amount for employees’ plans
  • SEP IRAs – One of the easiest plans to administer; contributions cannot exceed the lesser of 25% of compensation or $56,000
  • SIMPLE IRA – Easy to set up and administer; employee contributions cannot exceed $13,000 and require mandatory employer contributions of 2%-3%
  • SIMPLE 401(k) – Similar to a SIMPLE IRA, but offers the loan options of a 401(k) plan
  • Safe Harbor 401(k) – Another option that is easier to set up and administer than a 401(k); employee contributions cannot exceed $19,000 and require mandatory employer contributions of 3%-4%

To learn more about your business’s retirement investment options, contact Certified Financial Planner, Jacob Sturgill, for a personalized approach to uncovering your retirement investment priorities and to review your potential options.

For Plan Sponsor Use Only – Not for Use with Participants or the General Public.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.