Many people believe that a 401k plan can only be used by a large business, but it is perfectly possible for a business employing fewer than 100 people to benefit from a 401k. Even a sole proprietor can set up a 401k plan to provide for retirement. The 401k retirement plans that are available for small businesses can ensure that employees working in these businesses can enjoy a secure and comfortable retirement.
The basics of all 401k retirement plans are the same. Pre tax contributions are taken from the participant and may be matched by contributions from their employer. These contributions are invested and grow over time to ensure that the participant is provided for during retirement. The money may be invested in a number of different ways.
Participant contributions are taken before any tax payments are made. This reduces the taxable income of the participant, who will also avoid paying any tax on the money that is saved in their 401k plan. This investment will not be subject to taxation until the participant begins to take money out when they have retired. Their employer will also benefit because tax credits are available for businesses that decide to start a 401k retirement plan for their employees.
Traditional 401k plans can involve a great deal of administrative work and the costs of running such a plan can be high. These plans are also subject to costly discrimination testing. This compares the contributions made by the highest earning participants in the business to those made by lower earning staff. If the balance is not right, then the business will be penalized. Safe harbor 401k plans are an alternative that allow businesses to avoid discrimination testing, although unlike the normal 401k, matched contributions are required.
Small businesses may be better served by a SIMPLE 401k. This is a retirement plan that does not require any discrimination tests, and which has lower costs and less administrative work. Participants in the SIMPLE 401k still experience the same benefits as those whose employers have chosen a regular 401k plan. The employer is required to make matched contributions for all employees who are eligible for the plan.
A solo 401k is available for sole proprietors who have no employees, other than their spouse. This plan has high contribution limits and is designed to help business owners prepare for their own retirement. Solo 401k plans are the easiest to administer.