Employer sponsored retirement plans, whether a 401k, a SEP IRA, or a SIMPLE IRA, can be a great tool with many benefits for small businesses, their owners, and employees alike. The benefits extend far beyond simply providing another place to stash away money, and some benefits you can reap the rewards of today.
1. Tax Benefits – Tax Deferred Growth and Current Tax Mitigation
Most people understand the concept of compound growth, and many are already aware of the obvious benefit that tax deferred growth offers in IRAs. With employer sponsored retirement plans, not only are participants able to take advantage of tax favored growth and possible income tax deductions, employer contributions to these plans are often deductible to the business up to certain limits, depending on the plan. These tax advantages are something that your small business can realize now to help mitigate current tax liabilities, while also providing a retirement benefit for employees.
2. Higher Contribution Limits
An advantage that employer sponsored plans possess over IRAs for individuals is a much larger contribution limit, allowing business owners and other employees to put away more money into a tax favored account than using IRAs alone. For 2016, the contribution limit for IRAs is $5,500 a year. For a 401k and a SIMPLE Plan, the deferral limit is $18,000 and $12,500 respectively. This allows owners and highly compensated employees to get more of their assets into a tax favored account quicker, so that they may enjoy current tax mitigation as well as tax favored growth.
3. No ROTH Phase-outs for 401k Plans
For those that are not as concerned about decreasing their current tax liability, ROTH IRAs are a powerful tool in that they allow for tax-free growth and tax-free qualified withdrawals at retirement. The problem some successful business owners encounter is the income phase-outs for ROTH IRAs, which disallow ROTH IRA contributions based on income levels. This disallowance is not an issue when it comes to contributions in a 401k. Participants may elect to make traditional (pre-tax) contributions or ROTH (post-tax) contributions, regardless of income level, which allows successful business owners access to tax-free growth and tax-free qualified distributions in retirement.
4. Creditor Protection in North Carolina
It can be very easy to dig yourself into a hole when it comes to debt. When creditors start making claims to recover their money, participants and business can rest assured knowing that their retirement plans are safe from claims by creditors of consumer debt.
5. Forced Savings
Employer sponsored plans can usually be automated, with the same deferral percentage being withdrawn from participant paychecks each month and deposited into their retirement account. With this money being withdrawn before participants receive their paycheck, it makes it easier to establish a routine of saving. Participants are more likely to stick with their savings routine, ultimately putting them in a better position many years down the road.
6. Better Morale
Last of all, having a retirement plan in place improves overall employee morale. An employer with a retirement plan in place is showing employees that they do care about their well-being, and want them to be more financially sound when it comes to retirement years. With employer matches and profit sharing contributions, the employer is helping and providing incentive for participants to save so that employees can reap the rewards of their hard work with an enhanced quality of life in retirement.
By: Josh Rosenberg, Investment Advisor Representative
Nabell Winslow Investments and Wealth Management
Securities and advisory services offered through Cetera Advisors LLC, member FINRA, SIPC. Cetera is under separate ownership from any other named entity. The information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult your legal or tax professional for specific information regarding your individual situation.