Invest in your business - Aegis Financial

A 401(k) may be just the way to do it

According to an analysis by the Economic Policy Institute the median working-age couple has only saved $5,000 for retirement, and 70% of couples have less than $50,000 saved. Considering retirement can last 30 years or more, having a solid savings plan is crucial to everyone’s well-being and long-term happiness – both yours and your employees’.

As a business owner you know that establishing an attractive culture is key both in recruiting new talent and keeping existing employees satisfied, and a retirement plan can help you reach those goals while supporting your business in other ways. Employer contributions to retirement plans are tax-deductible, and assets in the plan grow tax-deferred*, not to mention the potential savings in onboarding and recruitment by better supporting your current employee-base.

You have enough on your plate without adding on the administration of a retirement plan, but one popular retirement plan option – the 401(k) – comes in several variations allowing business owners to choose the appropriate level of administrative complexity at a cost they feel comfortable with. While 401(k)s are commonly associated with large entities, the programs below are worth considering for small and midsize companies.

Safe harbor 401(k)

Pro: A popular choice for business owners who have highly compensated employees who want to contribute more than the traditional rank and file. The safe harbor 401(k) allows business owners to contribute the maximum deferral amount to their own account while also automatically satisfying IRS nondiscrimination testing – designed to ensure contributions to rank and file employees are proportional to those for owners and managers.

Consideration: The administration and the employer contribution with this plan can be costly, however, the business owner can take a tax deduction. It may be worth noting that employees are 100% vested, as well.

Traditional 401(k)

Pro: The traditional 401(k) comes with the benefit of customization. You don’t have to provide a match, or you can tailor your contributions to suit your preference or business model. For example, a business with high turnover may find a multiyear vesting schedule to be a good fit.

Consideration: While you don’t have to provide a match with this one, doing so may get you a better tax benefit. Additionally, if you have highly compensated employees contributing more than the rank and file, you will not pass discrimination testing.

Profit sharing

Pro: Every 401(k) plan comes with a profit sharing component, but it’s up to the employer whether or not they choose to contribute. This feature allows business owners to organize their workforce into groups and reward each of those groups differently based on their role or performance. For example, a law firm may choose to compensate their partners, attorneys and support staff at different levels.

Consideration: If you include this component, you may also need a safe-harbor contribution to pass nondiscrimination tests.

Automatic enrollment

Pro: This feature can also be added to any 401(k) plan and is a great way to increase employee participation, as everyone is automatically enrolled.

Consideration: For those who do not wish to participate, they’ll have to physically opt out of the program by a certain date to avoid contributions being made to a plan.

With options to customize the level of cost and administration, as well as potentially significant tax benefits, there are many worthwhile reasons for business owners to consider a 401(k) or other retirement plan. Your financial advisor is always available to be a knowledgeable resource for you and your business.

*Withdrawals are subject to income taxes and, prior to age 59 1/2, a 10% federal tax penalty may apply. Raymond James does not offer tax or legal advice. Please consult the appropriate professional before making any decision that may affect your tax or legal situation.

Next steps:

Determine what your priorities are in a retirement plan, per your business model, time and budget.
Consider which plan features would most benefit or be appreciated by your employees.
Make an appointment with your financial advisor to discuss your options.

Material prepared by Raymond James for use by its advisors. Raymond James is not affiliated with any companies mentioned in this material.