Many business owners will at some point begin thinking about their retirement and that of their employees. The best retirement plan is the 401(k), and the sooner you get started, the better. However, there are some essentials you’ll need to know in order to make the best use of it.
Types of 401 K Plans
The 401 K comes in different varieties, so it is important to find one which best suits your needs. The most popular variations are the simple 401 K, traditional 401 K, safe harbor 401 K and individual 401 k. Each plan has distinct aspects and yet all allow participants to deduct amounts from their salaries in order to place in the account. Additionally, each variation will have its advantages and disadvantages.
The Simple 401 K
Eligibility for this plan depends on whether your company employs fewer than one hundred people who has earned a minimum of $5,000 the year before. The simple 401 K is a mixture of a basic IRA and a traditional 401 K since it provides features that can be found in these plans. Employees can contribute a maximum of $11,500 annually into this account while their employers can add a maximum of three percent of the salary of their employees. This account is easy to establish but is restrictive in contribution limits when compared to the other types.
Traditional 401 K
This plan provides lots of investment opportunities. The employer will have to decide if they want to match the contribution of their employees or contribute a portion of the income for every employee. This plan gives you the option to do both if you so choose. The biggest advantage of this plant is that it is highly flexible, and allows employers to alter their contribution amounts annually. However, this plan has stringent testing requirements and they also tend to be costly due to administrative fees. Additionally, if compliance is not adhered to owners of this plan could lose their tax advantages.
Safe Harbor 401 K
This particular plan, unlike the traditional 401 K, does not require testing. It allows employees to contribute a portion of their wages with every paycheck along with contributions from their employers. The biggest advantage of this plan is that participants don’t have to worry about overly complex administrative requirements. Additionally, the costs are also lower. However, the contributions which must be made to the safe harbor 401 K tend to be substantially higher than that of other plans. This won’t be a problem for companies with steady income streams, but could be an issue with startups.
Individual 401 K
This plan is also known as the solo 401 K and shares many similarities with the traditional plan. However, it is specifically designed for those who are self-employed or in a partnership, and do not have standard employees. This plan allows you to make contributions as an employee and employer, which is not possible with other plans. However, if at some point you decide to hire employees, you’ll need to revert to a different plan.