With COVID-19 having a far-reaching impact on every aspect of life, it’s understandably challenging for many small business owners to think about saving for the long term especially if figuring out how to survive in the short term is priority number one. Just know that starting a 401(k) and saving for the future can actually help you save money in the short term as well. And setting one up is far easier and cost-effective than you may think.
Any size business can have a low-cost 401(k). There are substantial tax credits and deductions in having one, plus it helps provide strong saving and tax benefits for all. In addition, we’re learning that in crisis, retirement accounts can be an emergency funding source to bridge to more normal times. Further, the money is typically protected from creditors if things do go south. Any size business on even decent financial footing can get started today.
There are so many misconceptions surrounding 401(k)s—both during normal times and during the pandemic—and here we’re going try to shine a light on the realities.
Tax Benefits from a 401(k) Can Save You Money in the Here and Now
Contributing to your 401(k) account could have a major impact on your lowering your taxes with each paycheck. In fact, depending on how much you earn and contribute to your 401(k), it could even drop you a tax bracket. Not only are there personal tax savings for owners and employees, but there are also tax credits and deductions available for the business that are significant.
Many small business owners start a 401(k) plan because they wanted a tax break on their personal income and wanted their employees to enjoy this benefit too. In 2020, business owners with employees can contribute up to $19,500 tax-deferred into their company's 401(k) plan ($26,000 if you are age 50 or over). With an employer match and/or profit share, high earning employees may be able to put away $57,000 per year ($63,500 if 50 years of age or more).
The recently passed Secure Act also offers major tax credit increases. Signed in the first part of 2020, the Secure Act offers compelling and substantially increased tax credits for businesses with 1-100 employees. It allows for up to $15,000 in tax credits for small businesses starting their first 401(k) plan. These credits are applied over the first three years of the plan.
Any Size Business Can Save with a 401(k) Plan, Even the Self-Employed
In our latest research in April, we found 64% of small business owners who don’t have a 401(k) plan think their business is too small. In actuality, no business is too small to have a 401(k) plan, even the self-employed can have a Solo 401(k) plan. That’s right. Companies of all sizes, from the self-employed to businesses of thousands of employees, use 401(k) plans to get ready for retirement.
The truth is that some 401(k) providers make it simple for any size business to get started. For example, starting a ShareBuilder 401k plan can be done online or via your mobile phone over lunch, and managing it only takes minutes each payroll plus a one-time year-end online filing process. And, you have service pros available to help you and your employees when you need them.
If Matching Is a Concern, It’s Not Required
Despite the common belief, providing a company matching contribution for your employees’ is completely optional. Some companies provide no match, some manage costs and leverage as an employee retention tool via vesting schedules, some only provide a profit share when they have a good year, and some choose an immediately vested match. There is lots of flexibility for your business to design what works best for you.
And don’t forget, giving your employees a 401(k) contribution, be it a match, profit share or other, is often 100% tax deductible for your business. This tax deduction helps keep 401(k) costs low so that it is more affordable and provides added incentive to help you and your employees save for retirement. Matching is often more of a cash flow decision versus an affordability issue when this is taken into account.
Yes, Low-Cost 401k Plans Do Exist
It doesn’t have to be costly for a small business to have a 401(k) plan. There are now providers that offer affordable and low-cost plans for any size business. It's typical to pay a one-time setup charge and an ongoing monthly price for administration and support. For the self-employed, this is pretty minimal. For a business with 1 to 10 employees, a price of less than $100 or so per month might be expected. And remember, if you start your first 401(k) plan and have 1 to 100 employees, you can qualify for up to a $5,000 tax credit for each of the first three years of your plan. While most small businesses won’t need to use near this much of the tax credit, it’s pretty compelling. And your setup and administrative costs are generally tax deductible too.
You Don’t Need to Be an Investment Expert
Yep, you can offload investment responsibilities and risks to save you time, money and energy. And you don't have to spend a lot of time making complicated and important investment decisions when determining and managing your 401(k) plan fund roster. Rather, providers like ShareBuilder 401k have an investment committee of financial experts that monitor and manage the investment roster from which you and your employees select. As ShareBuilder 401k isn’t a fund provider, we take an unbiased approach to fund selection and monitoring of the investment options available to plan participants. This helps ensure a high-quality† retirement appropriate fund menu for your company in line with regulations. Choosing a 401(k) plan that is overseen by an investment advisor – an ERISA 3(38) financial advisor to be exact – transfers the investment management duties, responsibilities, risk, and work off of you and to the plan provider.
So, whether you’re a small business who’s been drastically impacted by COVID-19 or you’re one of the fortunate ones who have fared well through the pandemic, starting a 401(k) can be surprisingly easy while offering substantial ways to save—both for today and tomorrow.
† High-quality Funds: The ShareBuilder Advisors Investment Committee conducts an annual review of the Exchange-Traded Funds oﬀered as ShareBuilder 401k fund options. This review includes multiple variables including length of time since inception, asset level, historic performance over one to ten years, expense ratio, and how the funds compare to their respective benchmark indices. Each fund is monitored, and changes are made to the fund lineup as needed to align the investment options to the Investment Committee’s investment policy.