ShareBuilder 401k Blog

ETFs & Index Funds in Your 401(k): Benefits, Performance & Lower Costs

## What Makes ETFs Great for 401(k) Plans? [Exchange-Traded Funds](https://www.sharebuilder401k.com/services-investments/etf-lineup/ "ETF Lineup") (ETFs) can be a great fit in 401(k) plans because they offer low costs, broad diversification, and a simple index-based approach. Many ETFs track market indexes, which helps keep fees low. Over time, lower-cost index investing has often outperformed the vast majority of actively managed funds, helping more retirement savings stay invested and growing. ## Key Takeaways - Many ETFs are [low-cost](https://www.sharebuilder401k.com/why/index-fund-advantage/ "Index Fund Advantage") and index based. - Lower fees (expense ratios) can leave more money invested for retirement. - ETFs can support broad diversification in a 401(k) lineup. - Lower-cost index investing has historically outperformed most active funds over time. - Minor differences in fees can add up in a big way for retirement savings. ## What is an ETF? ETF stands for Exchange-Traded Fund. Think of it as a basket of investments (stocks, bonds, or other assets) that you can buy and sell like a single stock. ETFs are comparable to mutual funds in one big way: they spread your money across many investments at once, which can potentially help reduce investment risk. But there are two key differences worth knowing: - First, ETFs trade throughout the day like stocks. Mutual funds only update their price once per day. - Second, ETFs almost always track an index. That means instead of paying someone to pick investments, the fund simply tracks the market. This is what helps keep ETF fund expense ratios low. It is important to note that ETFs have evolved. While most still follow a passive index strategy, a growing number of active ETFs exist now too. These are professionally managed but still incorporate the lower-cost ETF structure. ## How ETFs Can Support a Lower-Cost 401(k) Lineup ShareBuilder 401k has offered ETF-based 401(k) plan solutions [since 2005](https://www.sharebuilder401k.com/why/about-sharebuilder-401k "ShareBuilder 401k - Our Story"). Our approach was designed to give small businesses access to a diversified investment lineup with a focus on low-cost, long-term investing, and straightforward plan management. In addition, most ETFs are index funds which rarely have pass-through fees such as 12b-1 or revenue sharing that is more common in actively managed mutual funds. This is another reason that most 401(k) plans may offer only a few index mutual funds and are notably heavier in actively managed mutual funds. This can enable a provider or advisor to generate added revenue for themselves. Lastly, ETFs can have lower expense ratios than an index mutual fund. ETFs providers can issue added shares and are bought and sold on the open market, while mutual funds must manage the buying and selling of the underlying securities whenever an investor enters or exits the fund. This management of issuing, buying, and selling securities creates added costs for an index mutual fund that ETFs do not bear. --- >> [Get a quote](https://retire.sharebuilder401k.com/ShareBuilder401kBlog?utm_source=website&utm_medium=blog&utm_campaign=Why_ETFs) and see what an ETF-based 401(k) could look like for your business. --- ## What Are the Advantages of ETFs in a 401(k)? ETFs can offer several advantages in a 401(k), especially for business owners and employees focused on long-term retirement savings. Some of the biggest benefits include lower fees, broad diversification, and strong long-term performance potential. ### Access to Important Asset Categories Many 401(k) plans offer multiple equity funds, but few fixed and other asset classes that can perform during different economic environments. ### Lower Fees Investment fees can add up fast. The more you pay in fees, the less of your money stays invested. Many ETFs have lower fees than actively managed mutual funds, which can help both plan sponsors and participants keep more money in the market over time. ### Historically Strong Long-Term Performance Many ETFs track benchmark indexes rather than relying on active managers to pick investments. That lower-cost, index-based approach has historically outperformed many actively managed mutual funds across major asset categories over the long term: ![Actively Managed Funds vs Benchmark](//images.ctfassets.net/wsuay9fbp17w/3bG0wHgRBBxDbpkjJowkPZ/bc532333603b3a9e5c691ee0015eacd5/Screenshot_2026-04-30_at_2.52.58%C3%A2__PM.png) ### Lower Expense Ratios Can Make a Big Difference An [expense ratio](https://www.sharebuilder401k.com/blog/do-not-let-high-expense-funds-cost-you-your-retirement/ "High Expense Funds") is the annual fee a fund charges you. Even small differences in fees can have a major impact over time. ETFs tend to have lower expense ratios than actively managed mutual funds: ![Expense Ratios](//images.ctfassets.net/wsuay9fbp17w/5YGA67nxXdWZ0cScumGhxK/d478d91d652573586349c293d24b5c86/Expense_Ratios.svg) Here is a real example of how much fees matter. Imagine two investors, Dan and Jill. They earn the same salary, get the same raises, and earn the same return on their investments. The only difference is that Jill pays 1% in fees each year while Dan pays 2%. After 40 years, Jill has $376,000 more than Dan. Just from paying 1% less: ![Paying 1% Less Can Make A Big Difference for Your Retirement Savings](//images.ctfassets.net/wsuay9fbp17w/7uPU0ptYR2vGQqapPEA1Fk/6dfeef47e18c77536345d4865c42fc6e/Paying_less_than_1-_can_make_a_big_difference.png) ## The ShareBuilder 401k Approach At ShareBuilder 401k, our [investment philosophy](https://www.sharebuilder401k.com/why/sharebuilder-401k/ "Why ShareBuilder 401k") is built around a few simple ideas: - Investing is a Long-term Proposition - [Diversification](https://www.sharebuilder401k.com/blog/how-much-you-put-in-stocks-bonds-and-cash-is-a-big-deal-for-your-401k-savings/ "Stocks, Bonds, and Cash") is a must - [Costs matter](https://www.sharebuilder401k.com/help/understanding-401k-costs/ "Understanding 401(k) Costs") - Your Roster is Reviewed with Investment Management Expertise These principles help guide the investments offered in every ShareBuilder 401k plan. We also do not offer our own funds, so we are not incentivized to favor one investment over another. That allows us to focus on building a low-cost, diversified ETF lineup designed for long-term retirement investing. Our investment roster is reviewed regularly to ensure it remains aligned with that philosophy. >> [See our Full ETF Lineup](https://www.sharebuilder401k.com/services-investments/etf-lineup/ "ETF Lineup") ## Is an ETF-Based 401(k) Right for You? An ETF-based 401(k) may be a strong fit if you: - Want to keep investment fees as low as possible - Prefer a simple, index-based investment approach - Are focused on long-term retirement saving - Want to offer employees a competitive, low-cost retirement [benefit](https://www.sharebuilder401k.com/overview/cost-of-employee-turnover/ "Cost of Employee Turnover") An ETF-based lineup may be less of a priority if you specifically want active fund management, where a fund manager is making daily decisions to try and beat the market. --- >> Ready to offer a low-cost, ETF based 401(k)? [Get a quote today](https://retire.sharebuilder401k.com/ShareBuilder401kBlog?utm_source=website&utm_medium=blog&utm_campaign=Why_ETFs). --- ## FAQs ### What is an ETF? An ETF is a basket of stocks, bonds, or other investments that trade on an exchange like a stock. Most ETFs track a market index, though actively managed ETFs are growing in popularity too. ### How is an ETF different from a mutual fund? Mutual funds trade once a day at the market close. ETFs trade throughout the market day and usually charge lower fees. ### Are ETFs and index funds the same thing? Almost. Nearly all ETFs are index funds, but not all index funds are ETFs. Some index funds are still structured as traditional mutual funds. ### Why do lower fees matter so much? The simple answer is [compounding](https://www.sharebuilder401k.com/blog/what-is-compounding-and-how-it-helps-your-money-grow/ "What is Compounding"). A 1% difference in fees might not sound like a lot, but over 30-40 years can cost you hundreds of thousands of dollars in lost savings. ### Does ShareBuilder 401k offer ETFs? Yes, and we have since 2005. Our lineup covers a wide range of asset classes, and we review it regularly to ensure it remains low-cost, diversified, and optimized for the long term.

Save up to $72,000 from Taxes with a Self-Employed Solo 401(k)

A Solo 401(k) is a powerful tool for the self-employed to lower their yearly taxes while saving for retirement. Small business owners (contractors, entrepreneurs, etc) can [contribute up to $72,000 in 2026](https://www.sharebuilder401k.com/blog/401k-contribution-limits/ "401(k) Contribution Limits"), reducing the total income the IRS can tax. This can meaningfully lower their tax bill and may even push them into a lower tax bracket. --- ## Key Takeaways - A Solo 401(k) can be set up by anyone who owns or makes decisions for their own business and does not have employees. It can cover multiple business owners and their spouses. - The self-employed are both their own employee and employer in a Solo 401(k) plan, and can contribute up to the $72,000 total limit in 2026 ($70,000 in 2025). - By making pre-tax contributions, savers lower their taxable income for the year. The IRS taxes those contributions and their investment earnings when the money is withdrawn in retirement. - A [Solo 401(k) calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator/ "Find your Solo 401(k) Maxiumum") can help you find out how much money you can contribute each year based on your business entity type. --- ## How Much Can You Put in a Solo 401(k)? Any entrepreneur with their own business is considered both their own employee and employer by the IRS. This allows business owners to combine the overall employee and employer 401(k) contribution limit for up to $72,000 in 2026. Employer contributions are added to a Solo 401(k) often via [profit sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes "How Profit Sharing Helps Businesses Lower Taxes"), up to the limit (assuming your earnings enable you to max it out). --- *Learn how [ShareBuilder 401k](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Start your custom 401(k) quote") can support you and your business with a Solo 401(k).* --- | 401(k) Limits | 2025 | 2026 | | ----------------------------------- | -- | -- | | Employee contribution limit | $23,500 | $24,500 | | Annual limit per individual | $70,000 | $72,000 | | Age 50+ catch-up amount | $7,500 | $8,000 | | Age 60-63 catch-up amount | $11,250 | $11,250 | ## How a 401(k) Lowers Taxes for Business Owners [401(k)s](https://www.sharebuilder401k.com/blog/what-is-a-401k-and-how-does-it-work/ "401(k)s Explained") are retirement accounts that let savers grow their money with special tax benefits. Unlike regular taxable investment accounts, contributions and earnings in a 401(k) are only taxed once. Certain 401(k) expenses are also tax deductible for businesses. ### Employee Contributions (Elective Deferrals) Employee elective deferrals are the type of contribution you can make __as your own employee__ of your business. There are [two main employee contribution types](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/ "Roth 401(k) or Regular 401(k) – Which is Right for You?"): - Pre-tax (traditional) - Post-tax (Roth) Savers making employee contributions choose when their contributions are taxed, either upfront with a Roth 401(k) or later at withdrawal in retirement with a pre-tax 401(k). Contributions made pre-tax also have an added benefit of lowering your taxable income today, which can be beneficial if you expect a lower tax rate in retirement. __Pre-tax (Traditional) 401(k):__ - Contributions reduce taxable income today - Taxes are paid on withdrawals in retirement - Often used by those who expect a lower tax rate later __Roth 401(k):__ - Contributions are made after-tax - Qualified withdrawals are tax-free, including earnings - Often used by those who expect their tax rate to stay the same or increase in retirement __Roth 401(k) versus Traditional (Pre-tax) 401(k)__ | | Roth 401(k) | Traditional 401(k) | | ---------- | ---------- | ---------- | | Contribution Tax Treatment | Contributions are made with after-tax dollars. No tax break today. | Contributions are made pre-tax, lowering your taxable income today. | | Withdrawal Tax Treatment | Qualified withdrawals in retirement are tax-free (after age 59 ½ and 5 years after account has been opened). | Withdrawals are taxed as ordinary income in retirement; early withdrawals may incur a 10% penalty. | Many savers choose to contribute to both, creating tax flexibility in retirement. It’s a good idea to consult with a tax professional and also double check that your provider allows Roth contributions before making employee elective deferrals. ### Employer Contributions (Profit Sharing) Employer contributions, aka __employer profit sharing contributions__, allow you to contribute as an employer up to the IRS annual contribution limit. You can generally contribute up to __25% of your W-2 compensation__ (or for Sole Proprietors, ~20% of net self-employment income). Note that profit sharing contributions must always be made pre-tax and are __100% tax deductible__. ## How to Determine the Amount You Can Contribute as an Employer The calculation to determine how much you put into your 401(k) as an employer is based on two key variables: - How much you have contributed as an employee - Your business entity type The type of entity you formed will be important in determining this calculation. If your business is structured as a corporation, you can make employer contributions up to 25% of W-2 earnings into the 401(k) plan. --- *Try our [calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator "Solo 401(k) Contribution Calculator") to see your estimated Solo 401(k) contribution amount in seconds.* --- If you’re a Sole Proprietor, Single Member LLC, or Partnership, this percentage is based on your net Schedule C income. The [IRS has information](https://www.irs.gov/retirement-plans/one-participant-401k-plans "One-participant 401(k) plans | IRS") to help you get started. You’ll want to talk to your tax advisor before determining the final number. ### An Example of How to Lower Your Taxes by $12,075 or More with Solo 401(k) Contributions The amount you can tax defer into a Solo 401(k) will vary by your earnings and your tax rate. Here’s a hypothetical example of a 45-year-old Sole Proprietor: Let’s assume her earnings are $200,000, and she has already made $23,000 in pre-tax contributions to her 401(k) as an employee. As her own employer, she can make additional employer contributions of $37,374 for a total of $60,374. This will lower her taxes by $12,075, assuming an effective tax rate of 20% versus a person that doesn’t contribute to a retirement plan at all. ##### Example Solo 401(k) Saving and Tax Calculation Comparison | | With 401(k) Contributions | Without a 401(k)| | ------------ | :----------: | :----------: | | Earnings| $200,000 | $200,000 | | Employee Contribution | $23,000 | $0 | | Max Employer Contribution (Sole Proprietor) | $37,374 | $0 | | Taxable Income| $139,626 | $200,000 | | **Taxes Owed (20% Effective Tax Rate)**| **$27,925** | **$40,000** | The owner that contributed pre-tax to their Solo 401(k) paid $12,925 less in taxes this year while saving $60,374 towards retirement. In actuality, the tax savings could be even greater depending on the effective tax rate of each individual. This example is not meant as tax advice. When pre-tax 401(k) funds are withdrawn in retirement, they will be taxed with the exception of any Roth 401(k) savings. It’s a good idea to consult a tax advisor to discuss your specific situation, including other deductions you may qualify for. ### A Smart Approach to Contributing to a Solo 401(k) Again, since Solo 401(k) holders act as both employer and employee, there are two contribution opportunities. As an employee, contributors can set aside a fixed monthly amount that fits their budget throughout the year. Then, after year-end, they can make a single employer contribution that balances tax savings with retirement goals before the tax filing deadline. ### Solo 401(k) Contribution Deadlines Business entity type determines contribution deadlines for Solo 401(k) holders. S-Corps and Partnerships typically face a __March 15th__ deadline for employer contributions, while Sole Proprietors and Single Member LLCs have until __April 15th__. See our [Solo 401(k) Contribution Deadlines](https://www.sharebuilder401k.com/blog/solo-401k-contribution-deadlines/ "Solo 401(k) Deadlines") article for a full breakdown of employee and employer contribution and set up deadlines. --- ## Solo 401(k) FAQs --- ### Can a married couple have a Solo 401(k)? Yes, a Solo 401(k) can cover any owners of a business and their spouses. ### Can I start my own Solo 401(k)? To start a Solo 401(k) plan, you must either own or make decisions for a business and not have any W2 employees. ### How to open a Solo 401(k)? You can open a Solo 401(k) by getting a [quote](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Start Your Custom 401(k) Quote") from a qualified 401(k) provider. Try to find one that is also a [licensed fiduciary](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles/ "Understanding the Roles of a Fiduciary") who is legally required to act in your best interest. ### Is a Solo 401(k) tax deductible? Any business expenses involved in setting up ongoing administration, and employer-side profit sharing into a Solo 401(k) are 100% tax deductible. Contributions made as an employee are not separately tax deductible, although they do have other tax benefits. ### Can I roll my 401(k) into a Solo 401(k)? Whether a Solo 401(k) plan accepts rollovers depends on the plan’s provider. ShareBuilder 401k’s [Solo 401(k) Saver](https://www.sharebuilder401k.com/products-pricing/overview/ "Solo 401(k) Saver Product Overview") and [Solo 401(k) Plus](https://www.sharebuilder401k.com/products-pricing/overview/ "Solo 401(k) Plus Product Overview") plans both accept rollovers, which can greatly simplify your retirement planning. ### Can I have both SEP IRA and a Solo 401(k)? The short answer is yes, however you need to pay attention to contribution limits for both plans. A professional tax advisor will likely be needed to make sure both plans stay in compliance.

How to Use a Solo 401(k) Calculator - Save More with a 401(k)

To use a [Solo 401(k) Calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator/), simply enter your business structure, filing year, age, and net income. It helps estimate how much money you can contribute to your 401(k) plan. Small business owners can save up to the [maximum limit for both employees and employers](https://www.sharebuilder401k.com/blog/401k-contribution-limits/), making a [Solo 401(k)](https://www.sharebuilder401k.com/products-pricing/solo-401k/) one of the most powerful tax-saving tools available. ## Key Takeaways: - Entrepreneurs can save up to $72,000 in a 401(k) this year, but the final total depends on your situation. A [Solo 401(k) calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator/) can help you find your limit. - Making pre-tax 401(k) contributions lowers your taxable income today while also saving for retirement tomorrow. - Know your business’s deadlines! Missing a deadline could cost you valuable tax savings for the year. --- *Try our [calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator) to see your estimated Solo 401(k) contribution in seconds.* --- ## What is a Solo 401(k)? A [Solo 401(k)](https://www.sharebuilder401k.com/blog/how-the-self-employed-can-save-on-taxes-with-a-solo-401-k/) is a retirement plan built for self-employed people without employees. It can also be called an Individual 401(k), SoloK, One-Participant 401(k), and more. They all refer to the same powerful tool that helps entrepreneurs reduce their tax burden while saving for retirement. A Solo 401(k) allows business owners to save money as both an employer and an employee. This lets you save much more each year compared to other retirement accounts like an [IRA](https://www.sharebuilder401k.com/blog/what-is-the-difference-between-a-traditional-ira-and-a-401-k/). And as a bonus, employer contributions are tax-deductible for your business. ## How Does a Solo 401(k) Calculator Work? A Solo 401(k) calculator estimates your maximum contribution based on: 1. Your company’s business structure - Are you a sole proprietor, single-member LLC, S-Corp, C-Corp, or partnership? Each type is taxed differently. 2. Plan year contribution limits - Limits are usually adjusted yearly by the IRS. 3. Age - If you will be 50 or older by the end of the plan year, you can also make [catch-up (50+) or super catch-up (60-63) contributions](https://www.sharebuilder401k.com/blog/what-is-a-catch-up-contribution-and-how-does-it-work/), which increase how much you can save. 4. Net earnings - Your employer contribution limit is based on your earnings for the year. Higher earnings usually mean higher contribution limits. The benefit of using a Solo 401(k) calculator is that it handles the math for you. You do not have to be a tax expert to get a clear picture of your contribution limit! Try ShareBuilder 401k’s [Contribution Calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator/) to see just how simple it can be. --- *Learn how [ShareBuilder 401k](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) can support you and your business with a Solo 401(k).* --- ## How Much Can I Contribute to my Solo 401(k)? The self-employed can save up to $72,000 in 2026 ($70,000 in 2025) to a Solo 401(k). Your exact limit depends on your business type, age, and earnings. A Solo 401(k) calculator helps with the heavy lifting to find your specific limit. Here is a breakdown of contribution limits per business type for 2026: | Business Structure | Employee Contribution | Employer Contribution Percentage | Max Employer Limit | Total Max Contribution (excluding catch-ups) | | ---------- | ---------- | ---------- | ---------- | ---------- | | Sole Proprietor/Single-Member LLC | Up to $24,500 | *20% of net Schedule C income | $47,500 | Up to $72,000 | | S-Corp or C-Corp | Up to $24,500 | Up to 25% of W-2 salary | $47,500 | Up to $72,000 | | Partnership/Multi-Member LLC | Up to $24,500 | *20% of net Schedule C income | $47,500 | Up to $72,000 | **Exact employer contribution percentages depend on how much you pay in self-employment taxes.* *Limits are set by the [IRS](https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500) and are subject to change annually. Check with your tax advisor for a final number.* ### Employee vs. Employer Contributions Solo 401(k) contributions fall under two categories: - Employee - Can be up to $24,500 in 2026 ($23,500 for 2025). - Can be made either as pre-tax (traditional) or after-tax (Roth). - If you are 50 or over, you can contribute an additional $8,000 as a catch-up contribution or $11,250 as a super catch-up contribution if you are ages 60-63. - Employer ([profit sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/ "401(k) Profit Sharing: How Small Businesses Save on Taxes")) - The max limit is calculated as a percentage of your earnings, up to $47,500 in 2026. - Are only made pre-tax and are 100% tax deductible. ### A Smart Approach to Solo 401(k) Saving - Make automatic monthly employee contributions throughout the year. - Before the tax filing deadline, examine your retirement saving goals. - Use a [Solo 401(k) calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator/) to see how much you can contribute. - Make a one-time employer contribution. This will help to prevent mistakes and spread savings throughout the year. Make sure to check with a tax advisor before making final decisions. ## Solo 401(k) Contribution Deadlines Contribution deadlines for a Solo 401(k) depend on how your business is structured. Employer contributions are generally due by: - March 15th for S-Corps and Partnerships - April 15th for Sole Proprietors and Single Member LLCs See our [Solo 401(k) Contribution Deadlines](https://www.sharebuilder401k.com/blog/solo-401k-contribution-deadlines/) article for a full breakdown of employee and employer contribution and setup deadlines. ## Solo 401(k) & Solo 401(k) Calculator FAQs ### How accurate are Solo 401(k) calculators? A Solo 401(k) calculator is a great starting point, but are only as accurate as the info you put in. Factors like changes in earnings or your business structure can affect the numbers it gives you. Always check with a tax advisor before making final decisions. ### Who is a good fit for a Solo 401(k) plan? A Solo 401(k) could be a good fit if you are a business owner or make decisions for a business with no employees. This includes solopreneurs, freelancers, contractors, sole proprietors, etc. ### Who is covered under a Solo 401(k)? A Solo 401(k) covers any owner or owners of a business and their spouses. If a spouse earns income from the business, they may also contribute to the plan. Rules can vary by provider, so check before starting a plan. ### How can I start a Solo 401(k)? You can start by getting an [instant online quote today](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Start your 401(k) quote"). You can speak with one of ShareBuilder 401k’s [retirement experts](https://www.sharebuilder401k.com/why/service-advantage/ "The ShareBuilder 401k Service Advantage") to see if a Solo 401(k) is the right fit for you. ### Can I still have a Solo 401(k) for business if I also have a day job? Yes, you can contribute to both a Solo 401(k) and to a 401(k) account offered through your day job. But keep in mind that the employee deferral limit of $24,500 applies across all plans combined. Always check with a tax advisor before making final decisions.

Roth 401(k) Explained: How it Works, Rules & Tax Benefits

A Roth 401(k) lets business owners and employees save after-tax money in their retirement account, up to the [annual contribution limit](https://www.sharebuilder401k.com/blog/401k-contribution-limits/). It works as an added feature to a standard 401(k) that lets you choose Roth, [pre-tax](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/), or both contribution types. Qualified [withdrawals](https://www.sharebuilder401k.com/blog/when-can-you-withdraw-from-your-401-k/) made in retirement are tax-free, which can be valuable if you expect to be in a higher tax bracket later. --- ## Key Takeaways: - Roth 401(k)s allow after-tax contributions that can be withdrawn tax-free in retirement, earnings and all. - Roth 401(k)s have no income limits, unlike Roth IRAs. - Employees can split contributions between Roth (after-tax) and Traditional (pre-tax) 401(k) options. - Roth 401(k)s can be ideal for savers who expect to be in the same or higher tax brackets in retirement (thus allowing them to lock in current tax rates). --- *Learn how [ShareBuilder 401k](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) can support you and your business with a Roth 401(k).* --- ## How Does a Roth 401(k) Work? A Roth 401(k) lets employees contribute after-tax dollars to their workplace retirement plan. Because income taxes are already paid at the time of contribution, future investments made with this money can then grow tax-free over time. This can be a smart way to manage your taxes if you expect your tax rate to increase as you age. Roth 401(k)s are not a separate 401(k) account, but an added option within a 401(k) plan that might give you more tax-management flexibility in retirement. In addition, [new regulations allow employers](https://www.irs.gov/newsroom/secure-2-point-0-act-changes-affect-how-businesses-complete-forms-w-2) to choose to offer [matching](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match/) contributions as either Traditional (pre-tax) or Roth (after-tax) contributions. This gives employees even more flexibility in their retirement plans. However, make sure to double-check that your plan administrator supports this option. Traditional 401(k)s and Roth 401(k)s can both provide: - Automatic payroll deductions - Access to a diversified investment lineup - [Dollar-cost averaging](https://www.sharebuilder401k.com/blog/automatic-investing-how-it-helps-build-your-retirement/) through regular contributions As with any 401(k), withdrawing funds before age 59 ½ may result in taxes and a 10% early withdrawal penalty unless an IRS exception applies. For Roth 401(k)s, qualified withdrawals require that the participant meet age requirements and that the account has been held for at least five years. ## Pre-tax vs Roth The choice between a Roth 401(k) and a Traditional 401(k) comes down to when you want to pay taxes. Traditional (pre-tax) 401(k): - Contributions reduce taxable income today - Taxes are paid on withdrawals in retirement - Often used by those who expect a lower tax rate later Roth 401(k): - Contributions are made after-tax - Qualified withdrawals are tax-free, including earnings - Often used by those who expect their tax rate to stay the same or increase in retirement __Roth 401(k) versus Traditional (Pre-tax) 401(k)__ | | Roth 401(k) | Traditional 401(k) | | ---------- | ---------- | ---------- | | Contribution Tax Treatment | Contributions are made with after-tax dollars. No tax break today. | Contributions are made pre-tax, lowering your taxable income today. | | Withdrawal Tax Treatment | Qualified withdrawals in retirement are tax-free (after age 59 ½ and 5 years after account has been opened). | Withdrawals are taxed as ordinary income in retirement; early withdrawals may incur a 10% penalty. | Many savers choose to contribute to both, creating tax flexibility in retirement. However, it is always a good idea to consult with a tax advisor to determine the best approach for you. ### Roth 401(k) vs Roth IRA Both Roth 401(k)s and Roth IRAs offer tax-free withdrawals in retirement, but there are key differences: - Income limits: Roth IRAs have income restrictions; Roth 401(k)s do not. - Contribution limits: Roth 401(k)s allow significantly higher annual contributions. - Access: Roth IRAs are opened individually; Roth 401(k)s must be offered by an employer. | Attributes | Roth 401(k) | Roth IRA | | ---------- | ---------- | ---------- | | Contribution Limits (2026) | $24,500 | $7,500 | | Age 50+ Catch-up Amount (2026) | $8,000 | $1,100 | | Roth Income Limit | None | $168,000* | ^{**In 2026, beginning at $153K, the amount you are allowed to contribute begins to decrease, hitting $0 at $168K for singles (range is $242K to $252K for married couples filing jointly*} ## Is a Roth 401(k) Right for You? A Roth 401(k) may be a good fit if you: - Expect your income and tax rate to rise over time - Want tax-free income in retirement - Do not qualify for a Roth IRA due to income limits - Want to diversify how your retirement savings are taxed A Roth 401(k) may be less optimal if you: - Need the tax deduction today - Expect to be in a significantly lower tax bracket in retirement - Current cash flow is limited and need extra take-home pay now --- *If you’re considering a Roth 401(k), the team at [ShareBuilder 401k](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) can help you understand your options and decide what makes most sense for your business.* --- ## Roth 401(k) FAQs --- ### Is a Roth 401(k) better than a Traditional 401(k)? A Roth 401(k) isn’t inherently better than a Traditional (pre-tax) 401(k). The difference comes down to how and when your money is taxed. With a Roth 401(k), you pay taxes on contributions today and can take withdrawals tax-free in retirement. With a Traditional 401(k), you receive a tax break now, but withdrawals are taxed later. Which option is better depends on your current income, your expected tax situation in retirement, and your cash flow today. Consulting with a tax advisor can help reinforce you are on the right path. ### How is a Roth 401(k) different from a pre-tax or Traditional 401(k)? Traditional 401(k)s offer upfront tax savings through pre-tax contributions, which lowers your taxable income in the current year. Roth 401(k)s instead provide tax-free income in retirement via after-tax contributions. ### Are there income limits for a Roth 401(k)? No. Unlike Roth IRAs, Roth 401(k)s have no income restrictions. ### Can I contribute to both Roth and Traditional 401(k)s? Yes. You can split contributions between Roth and pre-tax options if total contributions stay within annual IRS contribution limits. ### Is there a downside to a Roth 401(k)? The main drawback of a Roth 401(k) is that you don’t receive a tax deduction on your income tax when you contribute. Because contributions are made after you pay taxes, your take-home pay will be slightly lower compared to contributing the same amount to a Traditional 401(k). ### At what salary should you not use a Roth 401(k)? There isn’t a specific salary level where a Roth 401(k) automatically doesn’t make sense. As a general rule, it’s more helpful to think about your current tax bracket and what you anticipate it to be in retirement. For example, if you are currently in a high tax bracket and expect your income and tax rate to be much lower later, Traditional 401(k) contributions may be more tax efficient.

Save up to $70,000 in Taxes with a Self-Employed Solo 401(k)

The self-employed that have a Solo 401(k) plan have a powerful tool to lower this year’s taxes and save a lot for retirement too. The [2025 contribution limits](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/ "2025 401(k) Max Contribution Limits") for those under 50 years old is up to $70,000 in Solo 401(k) plan, up from $69,000 in 2024. That can truly lower your taxes and perhaps lower your tax bracket too. If you are 50 year of age or more, you put in up to $77,500 due to the catch up contribution. And now in 2025, if you 60-63 years of age there is a “super catch-up” of $11,250, which means this Solo 401(k) users could potentially put away up to 81,250 in 2025. Wow! You might have thought the contribution limit for a 401(k) is $23,500 in 2025. That’s true for the amount an employee can contribute to their 401(k) account. Employers can contribute too. As a self-employed person and owner of your business, you are both the employee and employer. This means you can add employer contributions, often via [Profit Sharing](https://www.sharebuilder401k.com/blog/profit-sharing-tax-benefits-for-businesses-and-owners "Profit Sharing Tax Benefits for Businesses and Owners"), up to the limit, assuming your earnings enable you to max it out. __How to Determine the Amount You Can Contribute as an Employer?__ The calculation to determine how much you put into your 401(k) is based on two key variables: 1) how much you have contributed as an employee, 2) your business entity type. The type of entity you formed will be important in determining this calculation. If your business is structured as a corporation, you can make employer contributions up to 25% of W-2 earnings into the 401(k) plan. If you’re a sole proprietor, single member LLC, or partnership, this percentage may be around 20% based on your net schedule C. The [IRS has a publication](https://www.irs.gov/retirement-plans/one-participant-401k-plans "IRS One-Participant 401(k) Plan Information and Publications") and worksheet that's fairly simple to follow. However, [there are calculators like this one](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator/ "Solo 401(k) Contribution Calculator") to help you quickly consider what the amount is likely to be. You’ll want to talk to your tax advisor before determining the final number. Just keep in mind, if you are figuring this out for the 2024 tax year, that total contributions as an employer and employee cannot exceed a combined total of $69,000 ($76,500 if you’re over 50 years of age and you maxed your employee “catch-up” contribution). __An Example of How to Lower Your Taxes by $12,075 or More with Solo 401(k) Contributions__ The amount you can tax defer will vary by your earnings and your tax rate. Here’s a hypothetical example of a 45 year old sole proprietor. Let’s assume her earnings are $200,000 and she has already contributed $23,000 to her 401(k) as an employee. As an employer, she can make additional employer contributions of $37,374 for a total of $60,374. This will lower her taxes by $12,075 assuming an effective tax rate of 20% versus a person that doesn’t contribute to a retirement plan at all. ##### Example Solo 401(k) Saving and Tax Calculation Comparison | | With 401(k) Contributions | Without a 401(k)| | ------------ | :----------: | :----------: | | Earnings| $200,000 | $200,000 | | Employee Contribution | $23,000 | $0 | | Max Employer Contribution (Sole Proprietor) | $37,374 | $0 | | Taxable Income| $139,626 | $200,000 | | **Taxes Owed (20% Effective Tax Rate)**| **$27,925** | **$40,000** | The owner that contributed to their Solo 401(k) paid $12,925 less in taxes this year while saving $60,374 towards retirement. In actuality, the tax savings could be even greater as the 401(k) contribution may also drop the owner a tax bracket and/or lower the effective tax rate more than a person who doesn’t use a tax advantaged account. Remember, this is a simple example and not meant as tax advice. When 401(k) monies are withdrawn in retirement, it will be taxed with the exception of any “employee” [Roth 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "What is a Roth 401(k)") savings. It’s a good idea to consult a tax advisor to discuss your specific situation including other deductions you may qualify for. __A Smart Approach to Contributing to a Solo 401(k)__ Again, since you’re both an employer and employee when it comes to your Solo 401(k) plan, the smart moves are to contribute a preset monthly amount as an “employee” that fit your budget during the calendar year, and then after year-end, review your situation and make a one-time, employer contribution that best balances your tax saving needs with your retirement savings goals before the filing deadline. __You Will Have Until Your Tax Deadline for Employer Contributions (and may for Employee contributions too)__ Your business entity type will determine when your tax deadline is for employee and employer contributions -- they can differ. Entities formed as S-Corps or Partnerships typically have until March 15th deadline for employer contributions, and all other entity types like Single Member LLCs and Sole Proprietors will have April 15th deadline. For employee and employer contribution deadlines, just review the chart in our [Solo 401(k) Contributions Deadlines](https://www.sharebuilder401k.com/blog/solo-401k-contribution-deadlines/ "Solo 401(k) Contribution Deadlines") article. __Takeaways__: - In a Solo 401(k) plan, the self-employed are both the employee and employer, so are able to contribute as both up to the $70,000 total limit allowed in 2025 ($69,000 in 2024). - Those that are 50 years or older may also contribute even more with the catch-up contributions allowed. - How much you can contribute as the employer is based on your business entity type and how much you have put in as an employee. A Solo 401(k) calculator can help you determine how much you can contribute as the employer. - Deadlines for current year contributions will vary based on your entity type for the last day to make employee and employer contributions to your plan. These dates may be different based on your business entity. Typically, your tax deadline (4/15 for sole proprietors) is the last date you may contribute. - The Solo 401(k) can help the self-employed contribute a large amount towards retirement while lowering taxes for the current year. It may even lower your tax bracket and effective tax rate significantly.

How a 401(k) Works & Which Plan Is Right for Your Business

A 401(k) is an employer-sponsored retirement savings plan that helps employees and business owners contribute to their retirement. It is named for Section 401, Paragraph K of the IRS tax code. Section 401(k) outlines the rules and guidelines around ERISA (Employee Retirement Income Security Act) employee-sponsored retirement plans such as 401(k)s. 401(k) plans are a popular retirement plan for businesses and employees because they offer flexibility, automatic payroll contributions, high contribution limits, and tax benefits. ## Key Takeaways: 1. A 401(k) is an employer-sponsored retirement savings plan that helps employees and business owners contribute to their retirement. 2. Businesses of any size can have a 401(k) plan, from the self-employed to businesses with employees. 3. Business owners with employees can consider Safe Harbor 401(k)s, Traditional 401(k)s, or Tiered Profit Sharing 401(k)s for their retirement needs. Typically, the choice depends on the size of the business and level of flexibility needed. 4. Self-employed business owners can use a Solo 401(k) to maximize their retirement savings. ## How Does a 401(k) Work for a Business? If you decide to offer a 401(k) plan for your business, you’ll need to select a 401(k) provider to offer these benefits for you and your employees. There are many providers to choose from, each offering a level of administration and service for a fee. --- *To see how ShareBuilder 401k costs stacks up against your current 401(k) plan, check out our [Cost Comparison Tool](https://www.sharebuilder401k.com/help/401k-cost-comparison/ "Cost Comparison Tool").* --- Once you select a provider and install your 401(k) plan, you (and your administrators) are now 401(k) “plan sponsors” and are responsible for ensuring that the retirement plan remains in good standing. After the 401(k) plan is set, employees and owners can contribute a portion of their salary to their retirement account. The contributions are invested in a [retirement-appropriate fund lineup](https://www.sharebuilder401k.com/services-investments/etf-lineup/ "ETF Lineup"), so the money may grow over time. These regular payroll contributions make use of an investing tactic called [dollar-cost averaging](https://www.sharebuilder401k.com/blog/how-automatic-investing-dollar-cost-averaging-helps-you-in-good-time-and-bad/ "dollar-cost averaging"). The money contributed to a 401(k) is invested with the goal of growing steadily and ultimately supporting each employee’s retirement. Money added to a regular 401(k) is contributed pre-tax and isn’t taxed until it is withdrawn in retirement. Many plans also offer a [Roth 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "Roth 401(k)") feature that allows participants to make after-tax contributions to their plans, so they can withdraw their money tax-free. Withdrawals before the age of 59½ may incur a 10% tax penalty. ### What is Employer Matching? While it’s not required, business owners with employees can also match an employee’s 401(k) contributions. An [employer match](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match/ "employer match") is an amount the company contributes to the employee’s retirement account, typically matching a percentage of the employee’s own contributions. These can either be immediately vested or part of a vesting schedule based on how you, the employer, decide to provide the match. If you’re managing 401(k) benefits, you can expect to do an upload with each payroll to your 401(k) plan provider or integrate this with your payroll. ### What is 401(k) Plan Testing? 401(k) plans are subject to [government tests](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/ "IRS Testing") to help ensure the plan is serving the best interest of employees. The IRS wants to ensure that non-highly compensated employees (NHCEs) are benefiting from the plan, and that highly compensated employees (HCEs) aren’t unfairly benefiting from the plan. To stay compliant with the IRS, a plan sponsor must submit an annual end-of-year checklist and fill out the [form 5500](https://www.sharebuilder401k.com/blog/what-is-form-5500/ "What is Form 5500") to complete plan testing. 401(k) providers can provide signature-ready forms to review and file each year. --- *Got questions? We have the answers! [Contact a retirement plan specialist](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "portal") to review your options for a 401(k).* --- ## What Types of 401(k)s Are There? ShareBuilder 401k offers four core types of 401(k) plans. Each provides flexibility for employers to meet their business needs while following required regulations.

| | Owner-Only Businesses | | Businesses with Employees | | | ---------- | ---------- | ---------- | ---------- | ---------- |

| | Solo 401(k) | Safe Harbor 401(k) | Traditional 401(k) | Tiered Profit Sharing 401(k) | | ---------- | ---------- | ---------- | ---------- | ---------- | | Best for... | Self-employed, owner-only, and spouses contributing >$7.5K per year. | Ensuring owners and highly compensated employees can contribute to the plan without restrictions. | Businesses that want the flexibility in matching or not, vesting schedules, and employee eligibility. | Rewarding employees by group, tenure, or age. | | Matching is... | Not Applicable. May contribute as an employee and an employer! | Required. | Optional, but may limit owner contributions. | Likely, depending on plan configuration. | | Is profit sharing available? | Yes, may profit share and/or contribute as an employee. | Yes, standard option available. | Yes, standard option available. | Yes, advanced options available. | | IRS testing is... | Not applicable until the plan reaches $250,000 in assets. | Automatically satisfied! | Required. | Required; may or may not automatically satisfy requirements. | |Vesting schedule is... | Not applicable. | Not applicable to employer match, may have profit share vesting if using. | An option with various percentages and years. May also choose not to use this feature. | Typically, immediate with flexible options for additional profit sharing. |

### Solo 401(k) A [Solo 401(k) plan](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401(k)") is for self-employed individuals or owner-only businesses without any employees (e.g. two partners own a business but have no other employees). Solo 401(k)s allow the self-employed to contribute a [maximum amount](https://www.sharebuilder401k.com/blog/401k-contribution-limits "401(k) Contribution Limits") of $72,000 for 2026 (or $80,000 if aged 50 or older), which is much higher than an IRA, which only allows $7,500 to be saved in 2026. A Solo 401(k) business owner may contribute as either an employee, the employer, or both. As an __employee__, the owner may contribute up to the maximum employee contribution limit of $24,500 for 2026 ($32,500 if aged 50 or older). By making __employer__ contributions, a business owner can contribute an additional $47,500 to their 401(k), allowing them to reach the maximum annual contribution limit. Maximizing contributions to a Solo 401(k) may offer meaningful tax advantages. By reducing taxable income, these contributions can help lower current-year personal taxes and may even place the business owner in a lower tax bracket. ### Safe Harbor 401(k) A [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/ "Safe Harbor 401(k)") helps maximize savings and simplifies plan management for a business. Safe Harbor plans automatically satisfy the requirements of IRS plan testing without all the hassle. By providing a “Safe Harbor” match that is fully vested right away to all employees who participate (including the owner), employers make sure everyone can contribute up to their yearly limit. Most employers choose to match 3% or 4% of an employee’s salary. These matching contributions are tax deductible for the business. If a small business with fewer than 50 employees is starting its first 401(k), it may qualify for [tax credits](https://www.sharebuilder401k.com/blog/irs-tax-credits-cover-costs-of-401k-for-small-businesses/ "401(k) Tax Credits") that help cover matching costs during the first three years. These tax credits make it easier for businesses to determine how to offer competitive retirement benefits while managing overall costs. ### Traditional 401(k) A [Traditional 401(k) plan](https://www.sharebuilder401k.com/overview/best-401k-for-your-business/ "401(k) Plan Types") offers added flexibility in plan features. Not only can businesses choose whether or not to offer 401(k) matching, but they are also able to establish vesting and/or eligibility rules to retain and reward loyal associates. Traditional plans can be a smart option for businesses that have highly seasonal cash flows and/or labor, experience relatively high employee turnover, or need the flexibility to leverage a different match amount than a Safe Harbor requires. The ability to add multi-year vesting schedules can also make these plans a valuable tool for employee retention, especially in high turnover industries. In addition, eligibility rules can simplify administration and plan costs for businesses with seasonal employees. Plan testing can become an issue when employees contribute much less than management. This can limit how much highly compensated employees are allowed to contribute, sometimes well below the $24,500 limit. One way to help fix this is by using [automatic enrollment](https://www.sharebuilder401k.com/blog/what-is-401k-automatic-enrollment/ "Automatic Enrollment") with a higher starting rate, like 5% or more. This encourages more employees to save and can reduce testing issues. ### Tiered Profit Sharing 401(k) Tiered Profit Sharing (also known as Advanced Profit Sharing) allows companies to define distinct employee groups and allocate different shares of profits to each group. While all types of 401(k) plans can include [profit sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/ "401(k) profit sharing"), Tiered Profit Sharing offers an added layer of flexibility and customization. In a standard profit sharing plan, the employer gives the same percentage to every employee. A Tiered Profit Sharing plan allows the employer to give different percentages or amounts to different employees. To meet IRS testing rules, these plans may need Safe Harbor contributions or other special plan features. For example, a manufacturing company might have separate groups for management, sales, and production employees. Each group can receive a different profit sharing allocation within the 401(k), helping align compensation with each group’s role and impact on the company’s success. Profit sharing for all 401(k) plan types are tax-deductible for the business. --- *To learn more about how a 401(k) with profit sharing could work for your business, [contact a retirement plan specialist](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "portal") to discuss your options.* --- ## Which 401(k) Plan is Best for Your Business? To determine which 401(k) is best for your business, it is a good idea to go through the different plan designs and compare them to your needs. If you are a self-employed business owner, your best option is a Solo 401(k) if you feel like you will contribute more than $7,500 a year to your retirement. Otherwise, an IRA is a good place to start. If your business has employees, you'll need to consider whether to offer a 401(k) match, set certain vesting schedules or eligibility rules, or determine if you need to give different employer contributions to employees based on specific criteria. Whatever the case may be, there is no better time than now to consider your and your business’s needs when it comes to benefits, taxes, and preparing for retirement. [Explore your 401(k) options](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "portal") and see what makes the most sense for you. --- ## FAQs --- ### What is a 401(k)? A 401(k) is an employer-sponsored retirement savings plan that allows employees and business owners to contribute a portion of their income toward retirement. Contributions are invested and grow over time, often with tax advantages such as tax-deferred or tax-free growth, depending on the type of 401(k). ### Why is it called 401(k)? It’s called 401(k) because the plan is defined under Section 401, paragraph (k) of the U.S. Internal Revenue Code. This section outlines the rules governing cash or deferred arrangements that allow employees to defer a portion of their compensation into retirement savings. ### How does a 401(k) work? A 401(k) works by allowing employees to contribute a percentage or dollar amount from each paycheck into a retirement account. Those contributions are invested in funds selected by the participant. Employers may also contribute through matching or profit-sharing. 401(k) contributions are typically made pre-tax, while Roth 401(k) contributions are made after-tax. ### Are employer matching contributions required? No, employer matching contributions are optional, and businesses can choose whether or not to offer a match based on their budget and benefits strategy. ### What type of 401(k) is best for a small business? The best 401(k) for a small business depends on factors like business size, cash flow, and desired flexibility. Self-employed individuals often benefit from a Solo 401(k), while businesses with employees may choose a Safe Harbor 401(k), Traditional 401(k), or a Tiered Profit Sharing plan. Each option offers different levels of flexibility, contribution requirements, and tax benefits.

401(k) Contribution Limits for 2026, 2025, and More

In 2026, 401(k) employee contribution limits increased to $24,500 from $23,500 in 2025. [Catch-up contributions](https://www.sharebuilder401k.com/blog/what-is-a-catch-up-contribution-and-how-does-it-work "What is a catch-up contribution?") for those over 50 increased to $8,000 from $7,500 in 2025, while the total 401(k) catch-up limit for those aged 60-63 stayed the same at $11,250. Because IRS limits shift every year, staying informed is key to building stronger retirement savings. --- ## Key Takeaways - The IRS can change the maximum amount you can contribute to your retirement account every year. - While employees can only contribute $24,500 into their 401(k)s in 2026, their employers can contribute more money for a total maximum 2026 contribution limit of $72,000. - In 2026, the 401(k) catch-up limit for those over 50 is $8,000. However, those ages 60–63 can use an enhanced catch-up of $11,250 instead of the standard $8,000. - Anyone over age 50 who made more than $150,000 in 2025 must make their 2026 401(k) catch-up contributions as post-tax (aka Roth). - Small business owners and those with mid-sized companies can also take advantage of high 401(k) limits. --- ## What is a 401(k) Contribution Limit? A 401(k)-contribution limit is set by the IRS to state on how much an individual and employer are allowed to put into an employee’s 401(k) savings account. These limits are set to account for inflation, cost of living, and other factors. A catch-up contribution is a type of retirement contribution that allows those 50 or older to make additional contributions to their 401(k) plan. If you're 50 or older, you're allowed to make an annual "catch-up" contribution on top of the annual allowed limit. This is to help individuals who are closer to retirement age save more for their future. ## 401(k) Contribution Limits for 2025 The 2025 401(k) contribution limit for employee contributions was $23,500, with a $70,000 maximum for combined employee and employer contributions. For those over age 50, the additional catch-up contribution limit amount was $7,500, for a total employee contribution max of $31,000. However, if you were ages 60-63, you qualified for the “super” catch-up, and your catch-up contribution limit rose to $11,250, for a total of $34,750. The catch-up contribution limit reverted back to $7,500 for those ages 64+. ## 401(k) Contribution Limits for 2026 The 2026 401(k) contribution limit for employee contributions is $24,500, with a $72,000 maximum for combined employee and employer contributions. For those over age 50, the additional catch-up contribution limit amount is $8,000, for a total employee contribution max of $32,500. However, if you are ages 60-63, you qualify for the “super” catch-up, and your catch-up contribution limit rises to $11,250, for a total of $35,750. The catch-up contribution limit reverts back to $8,000 for those ages 64+. ## Max 401(k) Contributions | 401(k) Limits | 2025 | 2026 | | ----------------------------------- | -- | -- | | Employee contribution limit | $23,500 | $24,500 | | Annual limit per individual | $70,000 | $72,000 | | Age 50+ catch-up amount | $7,500 | $8,000 | | Age 60-63 catch-up amount | $11,250 | $11,250 | | Annual compensation limit | $350,000 | $360,000 | | Highly compensated employees | $160,000 | $160,000 | ## Roth Catch-up Contributions Changes in 2026 Starting in 2026, employees who were high income earners in the previous year will be required to make catch-up contributions as [Roth](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "What is a roth 401(k)?"), aka post-tax. Workers will be split into two categories depending on their earnings. - Those with adjusted gross income more than $150,000 in the prior year will need to make all catch-up contributions as Roth contributions. This means you won’t be able to reduce taxable income with catch-up contributions. - Those with income less than $150,000 in the prior year can do catch-up as either traditional pre-tax or as Roth contributions. Note: This is only for catch-up contributions. Regular employee (and employer) contributions can still be made as either [pre-tax or post-tax](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/ "Which is better: pre-tax or post-tax?"). --- *See how our [401(k) plans](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Tell us about your company") make new rule changes easy for your business.* --- ## Difference between 401(k) and IRA Contribution Limits 401(k) contribution limits are usually up to 10x higher than [IRA](https://www.sharebuilder401k.com/blog/what-is-the-difference-between-a-traditional-ira-and-a-401-k/ "What's the difference between an IRA and a 401(k)?") contribution limits. The tax advantages for 401(k) savers versus who only have access to an IRA plan is now even larger. Note that 401(k)s do not have Roth contribution limits. | 401(k) Advantages Over Traditional IRAs in 2026 | | | | ----------------------------------- | :-: | :-: | | | __401(k)__ | __IRA__ | | Annual limit per individual | $72,000
(employee + employer contributions) | $7,500 | | Age 50+ catch-up amount | $8,000 | $1,100 | | Age 60-63 catch-up amount | $11,250 | N/A | | Roth income limit | None | $168K* | | Penalty-free access, if needed | Yes, via a loan** | No | ^{*The income phase-out range for taxpayers making Roth IRA contributions begins at $153K, hitting $0 at $168K for singles (range is $242K to $252K for married couples filing jointly).}
^{**Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can significantly reduce your retirement savings.} ## Solo 401(k) Contribution Limits Because the self-employed are technically their own employee and employer, they can also take advantage of the overall maximum 401(k) contribution limit, up to $72,000 in 2026. This means small business owners with [solo 401(k)s](https://www.sharebuilder401k.com/products-pricing/solo-401k "Solo 401(k) plans for your self-employed needs") can add employer contributions, often via [profit sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes "401(k) Profit Sharing: How small businesses save on taxes"), up to the limit assuming their earnings are high enough. The calculation to determine how much you can put into your 401(k) as a self-employed business owner is based on two key variables: 1. Your earnings 2. Your business’s structure If your business is structured as a corporation, you can make employer contributions up to 25% of your W-2 earnings into the 401(k) plan. If you’re a sole proprietor, single member LLC, or partnership, this percentage may be around 20% based on your net schedule C. The IRS has guides, though you’ll want to talk to your tax advisor before determining the final number. --- > *Try our [calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator "Solo 401(k) Contribution Calculator") to see your estimated Solo 401(k) contribution amount in seconds.* --- Additionally, if you make your contributions as pre-tax, you can reduce the amount of income taxes you owe in your contribution tax year. However, you will still pay taxes on those contributions and their earnings once you withdraw them in retirement, so make sure to plan accordingly. ## What Happens If I Contribute Too Much to My 401(k)? Over-contributions to your 401(k) can be taxed twice and may also face a 10% early withdrawal penalty if you are under age 59 ½. There are ways to correct and avoid these costs, but they must be done as soon as possible. Of course, an ounce of prevention is worth a pound of cure. Most 401(k) plans are supported with recordkeeping systems that help prevent going over the contribution limit. Some plans do not have these systems. In other cases, highly paid employees may be limited by plan rules and still accidentally over contribute. Talk to your company’s plan sponsor if you have any problems. Ask if your plan has alerts or systems in place to prevent over contributions. If not, find out what extra steps you should take to stay on track. --- ## FAQ --- ### How much can I actually put in my 401(k)? - You can put up to $24,500 to your 401(k) as an employee in 2026, but your employer can also contribute up to an additional $47,500 depending on your overall income and 401(k) plan structure. ### Does employer match count towards 401(k) limit? - Employer matching counts towards the total maximum 401(k) limit of $72,000, but does not effect the amount you can contribute as an employee. ### How much can I contribute to a solo 401(k)? - The solo 401(k) contribution limit (employee + employer) is $72,000 for 2026, but the amount you can actually put into your retirement savings depends on your overall income and your business’s legal structure. ### Can I contribute to a 401(k) and an IRA? - Yes, you can contribute to both a 401(k) and an IRA account in the same year, as they have separate IRS contribution limits. ### How many 401(k)s can you have? - You can have more than one 401(k), but you don’t get multiple limits. Every dollar you put into each plan is combined and capped at the yearly maximum. ### What are the new Roth catch-up rules? - Starting in 2026, high-income earners ages 50+ will need to make 401(k) catch-up contributions as after-tax (aka Roth). ### What are the 401(k) profit sharing plan limits? - All 401(k) plans have a maximum combined contribution limit of $72,000. However, the maximum amount allowed to highly-compensated employees under 401(k)s with tiered profit-sharing varies due to [plan structure](https://www.sharebuilder401k.com/products-pricing/plan-designs/ "ShareBuilder 401k Plan Design Options").

401(k)s Explained: Contributions, Matching, Taxes & Withdrawals

## What is a 401(k)? A 401(k) is an employer-sponsored retirement savings plan that helps employees and business owners contribute to their retirement. If you work for a company that offers a 401(k) plan, you can contribute a portion of your paycheck into a retirement account. That money is then invested and can grow tax-free over time. ## Key Takeaways: 1. A 401(k) is an employer-sponsored retirement savings plan that helps employees and business owners contribute to their retirement. Employees contribute a select percentage or dollar amount to the 401(k), which is then invested. 2. 401(k)s offer high contribution limits and no income restrictions compared to Individual Retirement Accounts (IRAs). 3. 401(k) contributions are typically made on a pre-tax basis, allowing you to defer taxes until retirement. Many plans also offer a Roth 401(k) option, which lets you pay taxes now and enjoy tax-free withdrawals of both contributions and earnings in retirement. 4. Most 401(k) withdrawals aren’t allowed until age 59½ and taking money out earlier can trigger taxes and penalties. While exceptions like the Rule of 55, in-service distributions, and required minimum distributions exist, eligibility and tax treatment depend on your age and your plan’s specific rules. ## How Does a 401(k) Work? ### 401(k) Enrollment If you have just been hired by a company that offers a 401(k), you’ll be asked to enroll in the 401(k) program. As a participant, or someone who is enrolled in a 401(k) plan, you cannot set up a 401(k) on your own. It must be sponsored by a company, unless you sponsor one yourself as a [self-employed individual](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401(k)"). For some companies, 401(k) enrollment is immediately available; you’ll be able to enroll and contribute to the 401(k) plan at once. Other companies elect to have [enrollment rules](https://www.sharebuilder401k.com/blog/401-k-enrollment-how-it-works/ "401(k) Enrollment Rules") that dictate when an employee can enter into the 401(k). Some rules include age or service requirements. For example, your company may need you to be over 21 years old and have 6 months of service. Some companies may choose to allow enrollment only during certain times of the year. It is all dependent on how the company’s 401(k) plan is set up. ### Funding Your 401(k) After you have enrolled in the 401(k), you will be asked to determine how much you want to contribute to your plan. Typically, the [contribution amount](https://www.sharebuilder401k.com/blog/how-much-you-should-contribute-to-your-401-k/ "401(k) Contributions") is based on a percentage of your salary but can also be set to a certain dollar amount. Many financial advisors suggest saving 10-15%* of your income over your career for a comfortable retirement. If you can’t quite start at 10%, then a great rule of thumb is to consider giving your 401(k) a raise. Each year when you get a raise at work, consider increasing your 401(k) contribution by 1%. --- > *You can use [ShareBuilder 401k’s online calculator](https://www.sharebuilder401k.com/help/savings-calculator/ "savings calculator") to calculate how long your retirement savings will last based on your current deferral percentage. You can adjust the percentage and see just how [saving 1% more](https://www.sharebuilder401k.com/blog/how-to-increase-your-retirement-savings/ "How to Increase Retirement Savings") may affect your retirement savings.* --- ### How Much Can You Contribute? 401(k)s a good choice for those who wish to start a retirement fund as they offer [high contribution limits](https://www.sharebuilder401k.com/blog/401k-contribution-limits/ "401(k) Contribution Limits"), especially when compared to IRAs. | | Under 50 Years Old | Age 50-59 or 64+ | Age 60-63 | | ---------- | ---------- | ---------- | ---------- | | Employee 401(k) | $24,000 | $32,500 | $35,750 | | Business Owner 401(k) | $72,000 | $80,000 | $83,250 | | IRA | $7,500 | $8,600 | $8,600 | Those under age 50 can contribute up to $24,500 with a 401(k), versus only $7,500 with an IRA. For those older than 50, catch-up contributions allow for an even higher contribution amount. If you’re a self-employed business owner, you can contribute up to $72,000 (or more with catch-up contributions). This is because self-employed individuals can contribute both as an employee and employer. With a 401(k), your income usually doesn’t affect whether you can contribute. You can save up to the annual contribution limit regardless of how much you earn. IRAs, however, do have [income-based restrictions](https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500 "401(k) Limit Increases") that limit how much you’re allowed to contribute or whether your contributions receive certain tax benefits. ### 401(k) Employer Matching Your employer may decide to offer a [401(k) employer match](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match/ "401(k) Matching") for your plan. 401(k) employer matching is an amount the company contributes to the employee’s retirement account, typically matching a percentage of the employee’s own contributions. The most common employer match is a “dollar for dollar match.” That means that for every dollar you contribute to your 401(k) plan, your company will contribute that amount up to a certain percentage. Say you make $75,000 and contribute 10% of your salary to your 401(k). You will contribute $7,500 annually to your retirement (not counting federal and state taxes). If your company offers a dollar for dollar match up to 4%, you will receive an additional $3,000 ($75,000 x 4%). That is essentially free money, or a bonus given to you by your company. | Employer Match | Employee's Salary | Employee Contribution (10%) | Employer Contribution (Match) | Total Annual Contributions | | ---------- | ---------- | ---------- | ---------- | ---------- | | 100%, or dollar for dollar, up to 4% | $75,000 | $7,500/year | $3,000/year | $10,500/year | In this scenario, you’ll want to ensure that you are contributing at least 4% of your salary to your 401(k) plan, or you won’t be taking full advantage of the entire employer match. Other common employer matching options include $0.50 on the dollar matching (or a 50% matching contribution), or even a fixed percentage that the employer automatically contributes on behalf of the employee, regardless of whether the employee makes their own contributions. ### 401(k) Investments Once your money is deposited into your 401(k) account, it is invested with the goal of long-term growth. Depending on your plan’s 401(k) provider, you’ll be able to choose investments from a [retirement-appropriate fund lineup](https://www.sharebuilder401k.com/services-investments/etf-lineup/ "investment lineup") or select from several model portfolios to build your nest egg. Each pay period, your contributions are automatically invested. Your regular payroll contributions make use of an investing tactic called [dollar-cost averaging](https://www.sharebuilder401k.com/blog/how-automatic-investing-dollar-cost-averaging-helps-you-in-good-time-and-bad/ "dollar-cost averaging"). The money contributed to a 401(k) is invested with the goal of growing steadily and ultimately supporting your future retirement. ## Pre-Tax vs Roth 401(k) Contributions By default, when you enroll in a 401(k), your contributions are made on a pre-tax or tax-deferred basis, which means you pay taxes later—not today. Some 401(k)s also allow for Roth 401(k) contributions. Roth 401(k) contributions allow participants to make after-tax contributions to their 401(k) account. Once in retirement, these funds, earnings and all, aren’t taxed during withdrawal.** When deciding between a tax-deferred 401(k) and a Roth 401(k), it’s important to consider your current tax rate and what you expect your tax rate to be in retirement. ### Pre-Tax 401(k): Contributing tax-deferred to your 401(k) will net you more tax savings in the current year, as these contributions reduce your current adjusted gross income. Taxes on both contributions and earnings are deferred until the funds are withdrawn in retirement, at which point they are taxed as ordinary income. ### Roth 401(k): Contributions are made with after-tax dollars, meaning they do not reduce your current taxable income. Because taxes are paid upfront, qualified withdrawals in retirement—including all earnings—are tax-free. Depending on whether your tax rate is higher now or in retirement, this approach may result in greater long-term tax savings.¹ Ultimately, choosing between pre-tax and after-tax contributions comes down to whether you prefer to pay taxes now or later: - If you prefer to pay taxes now or think your tax rate will be higher in retirement, contributing to your Roth 401(k) may be the better option. - If you want to reduce your taxable income today or keep more of your current paycheck, a traditional 401(k) may be more advantageous. - You can also choose to allocate a percentage of your salary to both. That way, you can receive some of the benefits of both retirement account types and diversify your tax exposure in retirement. If you’re unsure about how to allocate your retirement contributions, consult with your tax advisor to determine what works for you. ## Common 401(k) Plan Features ### Automatic Enrollment [Automatic enrollment](https://www.sharebuilder401k.com/blog/automatic-enrollment-rules-for-businesses/ "automatic enrollment") allows companies to sign up employees for the 401(k) plan automatically, meaning new hires are enrolled as of their start date. While employees can opt out, those who don’t are enrolled at a default contribution rate set by the company and will begin contributing that set percentage of their salary to the plan automatically. Beginning with the 2025 plan year, 401(k) auto-enrollment is now required for new plans started after 12/29/22. ### Automatic Escalation Some companies may choose to include a 401(k) plan provision that automatically increases an employee’s deferral election on a regular basis. The most typical cadence is an annual 1% increase. Participants can also choose to opt-out of auto-escalation. Beginning with the 2025 plan year, 401(k) auto-escalation is also required for new plans started after 12/29/22. ### Vesting Schedules Companies may impose [vesting schedules](https://www.sharebuilder401k.com/blog/401-k-enrollment-how-it-works/ "401(k) enrollment") for the employer-matched funds deposited into your 401(k). Vesting schedules determine when you officially "own" the employer contributions made to your 401(k) account. While the money you contribute is always 100% yours, the employer contributions may be subject to a vesting schedule. Here are the three common types of vesting schedules: | Vesting Type | Definition | | ---------- | ---------- | | Immediate Vesting | You own 100% of the employer contributions right away. | | Cliff Vesting | You become 100% vested all at once after a specific period (often 1 to 3 years). | | Graded Vesting | You become vested gradually over time, typically over a 3–6 year period. If you leave your job before you're fully vested, you may forfeit some or all of the employer matching contributions. | Understanding your vesting schedule helps you plan your career moves and retirement savings strategy. ## 401(k) Withdrawal Rules ### When Can You Make a Withdrawal? 401(k)s are meant to be a retirement vehicle, so there are strict rules on when and how you’re able to [withdraw your money](https://www.sharebuilder401k.com/blog/when-can-you-withdraw-from-your-401-k "when can you withdraw from your 401(k)"). Generally, you must wait until age 59½ to make a distribution (i.e. take money out of your account). If you make a withdrawal earlier, you’ll most likely owe a 10% tax penalty on top of income tax for pre-tax contributions. Some exceptions include: - You become permanently disabled - You leave your job at age 55 or older (Rule of 55) - You need funds for qualified medical expenses when your unreimbursed costs exceed 7.5% of your adjusted gross income, and you do not itemize your tax deductions These exceptions fall under in-service distributions, and their availability can vary depending on your 401(k) plan. Check with your plan administrator to determine if they are an available option. ### Rule of 55 The 401(k) Rule of 55 lets you take penalty-free withdrawals from your 401(k) if you leave your job in or after the year you turn 55 (or age 50 for certain public safety workers). The Rule of 55 only applies after you have left your job, not while you are still working. Some items to keep in mind: - Your specific 401(k) plan must allow early withdrawals - Applies only to the 401(k) at the job you just left—not previous plans or IRAs - Regular income taxes still apply, but the 10% early withdrawal penalty is waived - You must leave your job in the calendar year you turn 55 or later (50 for public safety roles) - You can take only what you need and can take multiple withdrawals over time, not just a one-time lump sum ### 401(k) In-Service Distributions In-service distributions allow you to withdraw money from your 401(k) while you’re still employed by the company sponsoring the plan. Once you reach age 59½, you can typically take distributions from vested employer contributions without incurring an early withdrawal penalty. Availability and eligibility depend on your plan’s specific rules, so in-service distributions may not always be an option. ### Required Minimum Distributions [Required Minimum Distributions](https://www.sharebuilder401k.com/blog/what-is-a-rmd/ "What is a RMD?") (RMDs) are mandatory withdrawals you must begin taking from your 401(k) once you reach a certain age. The [IRS sets the starting age](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs "IRS RMDS") at which you’re required to withdraw each year. The amount is calculated by dividing the balance of your retirement account on December 31 of the previous year by a number called your life expectancy factor, which is provided in [IRS tables](https://www.irs.gov/publications/p590b#en_US_2025_publink100089977 "IRS Tables"). Failing to take RMDs on time can result in significant tax penalties, so it’s important to understand when they apply and how much you need to withdraw. ## What Happens to a 401(k) When You Switch Jobs? If your 401(k) plan has $7,000 or more in assets, you can typically leave the account where it is when you [leave your job](https://www.sharebuilder401k.com/blog/what-happens-with-your-401-k-when-you-leave-a-job/ "What Happens When You Leave Your Job"). If your current 401(k) has a decent line-up of funds and low fees, this could be a good option. However, it’s common for departing employees to move or “rollover” their 401(k) monies into another retirement account, such as an IRA or the 401(k) of their new employer. Not only does it make administration easier, as all 401(k) monies are in the same account, but you can adjust investment allocations for your entire balance and see your rate of return. Just make sure to consider whether the investment expenses are the same or lower and if the provider offers investment funds you need or prefer. It is wise to leave your 401(k) assets in a retirement investment account, as cashing out your 401(k) and taking a lump sum distribution would result in taxation on the entire amount. If you’re under age 59½, you would also have to pay early withdrawal penalties as well. Rolling over your 401(k) assets is typically the best choice, as it is also more difficult to reinvest the money you cashed out since 401(k)s and IRAs have annual contribution limits. --- ## FAQs --- ### What is a 401(k)? A 401(k) is an employer-sponsored retirement savings plan that allows employees and business owners to contribute a portion of their income toward retirement. Contributions are invested and grow over time, often with tax advantages such as tax-deferred or tax-free growth, depending on the type of 401(k). ### Why is it called 401(k)? It’s called 401(k) because the plan is defined under Section 401, paragraph (k) of the U.S. Internal Revenue Code. This section outlines the rules governing cash or deferred arrangements that allow employees to defer a portion of their compensation into retirement savings. ### How does a 401(k) work? A 401(k) works by allowing employees to contribute a percentage or dollar amount from each paycheck into a retirement account. Those contributions are invested in funds selected by the participants. ### What's the difference between a pre-tax 401(k) and a Roth 401(k)? Pre-tax (tax-deferred) contributions can reduce your taxable income today, but withdrawals in retirement are taxed. A Roth 401(k) uses after-tax contributions, meaning you pay taxes now, but qualified withdrawals in retirement—including earnings—are tax-free. Choosing between them depends on whether you expect your tax rate to be higher now or in retirement. ^{*Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.} ^{**Withdrawals before the age of 59 1/2 may incur a 10% tax penalty.} ^{¹ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.}

401(k) Early Withdrawals: CARES Act Rules | ShareBuilder 401k

Here are answers to many Americans’ questions regarding access to retirement accounts before retirement age including if and how you can access your 401(k) or IRA monies. Moreover, this covers how the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) enables more flexibility to withdraw 401(k) and/or IRA monies for those that are or have been impacted by COVID-19 (see list of qualifications below in this post). In addition to the video, this blog spells out much deeper details on qualifications, rules, options, pitfalls and more to help you make the right decision for your situation.

## CARES Act – Who Can Qualify for These Temporary 401(k) Hardship and Loan Options and/or Early IRA Withdrawals You are a qualified individual under the CARES Act if any of these apply: - Are diagnosed with COVID-19 - Have a spouse or tax dependent who is diagnosed with COVID-19 - Experience adverse financial consequences as a result of: - being quarantined due to COVID-19 - being furloughed or laid off or having work hours reduced due to COVID-19 - being unable to work due to lack of childcare due to COVID-19 - the closing or reduction in hours of a business owned or operated by the participant due to COVID-19 Your 401(k) plan recordkeeper or IRA provider may rely on your attestation that you satisfy the requirements to be a qualified individual. No documentation is required. ## How Much Money May I Access from My IRA or 401(k)? Your options will vary by your age if you qualify under CARES. Plus, there may be 401(k) provisions for your company's specific plan that impact if you are able to access monies. Your employer can typically choose to change these provisions at any time. IRA withdrawals may be simpler in some scenarios than those from your 401(k). From the sections and chart below, see which best describes you and your situation. ### I’m over 59 ½ Years of Age and May or May Not Qualify Under the CARES Act Whether you qualify under the CARES Act or not, you can likely take withdrawals. With a 401(k) or IRA, if you are over 59 ½ years of age, you are of retirement age, so you qualify to take withdrawals without tax penalties. There is one caveat with a 401(k). Your plan must allow for distributions at the time of reaching retirement age. Some plans may have it set to be different which could prevent you from accessing these monies. The amount you withdraw will be subject to taxes. If you qualify for CARES, you may still want to consider these rules as it may lower your taxes. ### I’m under 59 ½ Years of Age, but I Don’t Qualify Under the CARES Act If you are under 59 ½ years of age, and you do not meet the CARES Act qualifications noted above, the standard rules apply to gain access: - If you have an IRA and take a withdrawal, you may take out up to the value of your IRA, but it will be subject to your current tax rate plus the 10% penalty. - Your 401(k) plan must allow for hardship and/or 401(k) loan to gain access to your 401(k) monies or you won't be able. If your plan allows, you may take a hardship and withdraw up to $50,000 of your vested 401(k) balance and this will be subject to a 10% tax penalty in addition to your current effective tax rate. - If your plan allows, you may take a 401(k) loan for half of your vested balanced up to $50,000. There is no tax penalty, but you may pay a nominal one-time or annual processing charge until it is paid back. Important: if you lose your job or switch jobs, any outstanding balance at the time you separate that is not paid back quickly (generally 30-60 days) is considered a withdrawal, and this unpaid amount will be taxable plus incur the 10% penalty. ## I Qualify Under the CARES Act, So How Do My Options Change? You may take a dollar for dollar early withdrawal of up to $100,000 from either your IRA and/or 401(k) and will not be subject to the 10% tax penalty. Distributions must be made to an individual between January 1, 2020 and December 31, 2020 under the CARES Act. With these withdrawals: - You do not incur the 10% “early distribution” penalty that generally applies to distributions from retirement plans and IRAs before age 59½. - There is no upfront tax withholding. With a typical early withdrawal, providers must withhold 20% for Federal tax at time of distribution. - You may avoid taxation altogether by repaying these distributions back to your IRA or 401(k) within 3 years. - If you will not payback some or all of the distribution, you may elect to spread this withdrawal (income) over 3 years to manage tax implications. If your 401(k) plan does not allow for a hardship withdrawal today, ask your employer to add it. Your employer may do so at any time. ### 401(k) Loan Limit Is Also Increased to $100,000 if You Qualify Under CARES Qualified individuals may take a loan from a retirement plan between March 27, 2020 and September 23, 2020. The CARES Act: - Increases the maximum loan amount from $50,000 to $100,000. - Allows you to take the full amount of your vested benefit as a loan, rather than limiting the loan amount to 50% of your vested balance. The CARES Act delays the due date for loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 for one year. In addition, it extends the maximum 5-year repayment period accordingly. Note the difference in applicable dates between the 401(k) loan and those for hardship and IRA early withdrawals. ## 401(k) Loan or Hardship Withdrawal, Which Is Better for Me? This isn’t a super simple decision. The nice thing about a 401(k) loan is you will pay back the amount you borrowed into your 401(k). The repayments (to yourself) help build back up your nest egg with each payroll. These are preset amounts taken from your paycheck similar to your 401(k) contributions. Most 401(k) loans are paid back over a 5-year horizon. However, this an added payment amount which you may or may not be in good place to afford right now. In addition, if you leave your company or lose your job and you have a 401(k) loan, you will need to pay off the loan in full to avoid being taxed on the unpaid balance. And, if you are under 59 ½ years of age, you are still subject to the 10% penalty on this unpaid balance whether you qualify under CARES or not. For the hardship withdrawal, if building back that nest egg is important to you, having the discipline to pay it back over the next three years may be tough, as it won’t be automatically taken from your paycheck unlike a 401(k) loan. That said, you will not get hit with any added tax penalty if you leave or lose your job. The amount you withdraw and that you do not pay back into a qualified account will be taxed at your effective tax rate. Know that this withdrawal may increase your tax burden and effective tax rate. A lot of variables to consider. It’s a good idea to talk to your tax accountant about what will be best. Here's a chart that may help simplify all this: #### Options for Those Under 59 ½ Years of Age | **Retirement Account Type** | **Do Not Qualify Under the CARES Act** | **Do Qualify Under the CARES Act** | | ------------ | :----------: | :----------: | | IRA Early Withdrawal|May take out the amount in your account, Subject to 10% tax penalty and 20% federal tax amount withheld|May withdraw from your account up to $100,000, No tax penalty and no federal amount withheld at time of withdrawal, If paid back to your account 3 years it is not subject to taxation; If not paid back you may spread income over three years| | 401(k) Hardship*|May take out 50% of your vested balance up to $50,000, Subject to 10% tax penalty and 20% federal tax amount withheld|May take 100% of your vested balance up to $100,000, No tax penalty and no federal amount withheld at time of withdrawal, If paid back in 3 years you are not subject to taxation, If not paid back you may spread income over three years| |401(k) Loan*| May take out 50% of your vested balance up to $50,000, No tax implications, Paid back with each payroll over 5-years, If you leave or lose your job the amount unpaid is subject to taxes and tax penalties| May take out 100% of your vested balance up to $100,000, No tax implications, Paid back with each payroll over 5-years, If you leave or lose your job the amount unpaid is subject to taxes and tax penalties| *403(b), money purchase, profit sharing, and 457(b) accounts generally have the same rules as 401(k)s regarding the above. We’re wishing you all ongoing good health and safety.

Target Date Funds vs Model Portfolios in 401(k) Investing

Target date funds and model portfolios both simplify 401(k) investing by automatically diversifying and managing your portfolio’s asset allocation. However, they take different approaches. Target date funds focus on a specific retirement year, while model portfolios let you choose your investment strategy based on your comfort with risk and estimated retirement date. Both can be effective tools for building long-term wealth. --- ## Key Takeaways: - Model portfolios and target date funds make it easier for busy and/or inexperienced investors to diversify and build their retirement investment portfolio. - Target date funds follow a one-size-fits-all approach for the retirement year you select, but their limited transparency on asset allocation management can lead to unexpected costs and risks. - Model portfolios empower investors to choose the investment portfolio most aligned with their personal time horizon and risk tolerance, but may require occasional adjusting (perhaps every 5 to 10 years) as retirement approaches. --- ## What is a Target Date Fund? A target date fund automatically adjusts its mix of investments over time, ideally becoming more conservative as the user gets closer to their selected target retirement date. They are meant to make selecting 401(k) investments as simple as possible, but can include unexpected costs and risks. To use a target date fund, investors pick the year around when they expect to retire, and that’s it. Target date funds adjust their [asset allocations](https://www.sharebuilder401k.com/blog/how-much-you-put-in-stocks-bonds-and-cash-is-a-big-deal-for-your-401k-savings/) to be more conservative as the fund approaches its target year. For example, a fund designed for retiring in 2030 should currently have a much more conservative allocation than a 2060 target date fund. Digging in deeper, an investor might notice a higher bond-to-stock mix in a more conservative fund while an aggressive portfolio may have no bonds in its allocation at all. However, it’s not all roses with target date funds. Target date funds don’t consider that people of the same age have different risk tolerances and goals, instead taking a one-size-fits-all approach. Investors also rely on the fund's manager to properly reduce risk as the target year approaches (the methodology should be disclosed in the fund prospectus). Some target date funds may [invest over aggressively as happened for too many](https://www.marketwatch.com/story/questions-arise-target-date-funds-after) during the Great Recession. Target date funds also tend to be more expensive than self-built portfolios. Most are structured as a “fund of funds,” adding an extra layer of expense. Model portfolios, on the other hand, may or may not charge an additional expense. For example, the investment management expense is the same whether you choose a model portfolio or build your own portfolio at ShareBuilder 401k. --- *[Talk to our retirement experts today](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) to find the right plan for you.* --- ## What is a Model Portfolio? Model portfolios, also known as risk-based portfolios or target risk funds, customize a mix of asset classes to match the specific risk tolerances and time horizons of investors. These portfolios typically range from very conservative to aggressive, allowing investors to choose what best fits their financial goals and life situation. Model portfolios tend to be much more precise than a target date fund on their ability to align with an investor’s needs, though they do require occasional adjusting as investors get closer to retirement (perhaps every 5 to 10 years). --- > *Not sure what your risk tolerance is? Take our [quick online quiz](https://www.sharebuilder401k.com/services-investments/investment-style/) to find an investment strategy that fits your needs.* --- In a 401(k), the financial goal is pretty straightforward – build your savings so you can retire. However, you may or may not be comfortable with big market swings, and you may be nearing retirement or decades away, so time horizons vary. For example, if you’re 25 and have decades before retirement, an aggressive model portfolio could be a good fit because you’ll have time to recover from sudden losses. Or perhaps you are 62 and thinking about retiring in a few years? If [market volatility](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down/) is something you want to minimize the impact of, a conservative portfolio is a nice solution. Model portfolios provide the flexibility to adjust your approach as your goals change, though they do require attention over time. Most importantly, model portfolios provide transparency. You can easily see the funds, allocation, costs, as well as time horizons and risk goals. Target date funds, on the other hand, can be harder to understand. They typically require investors to dive into the fund sheets and/or prospectuses to track how asset allocations will change. Our view is that [model portfolio transparency](https://www.sharebuilder401k.com/services-investments/model-portfolios/) and risk tolerance alignment are most critical for investors, and it is worth the minimal effort to switch portfolios every decade. Look for model portfolios with automatic rebalancing, so your asset allocation remains in line with your investing goals and risk tolerance. ## Balanced Portfolio Example Here is an example of a balanced model portfolio that clearly shows its mix of investments, designed for someone with a moderate time horizon and medium risk tolerance. It offers an equal mix of growth and income-generating investments. [View important disclosures.](https://s3-us-west-2.amazonaws.com/sb401k-public-prod-us-west-2/replicated/Model_Portfolio_Disclosure.pdf) ![Balanced Portfolio](//images.ctfassets.net/wsuay9fbp17w/2asPTE9vT6HIsYKhnDiWLw/4b0ed2f9cc0b1fe0282c7f9a194d953d/2025-12-09_13-06-11.png) Please note that this is only intended as an example, and that assets are chosen based on based on their historical performance. Ultimately, past performance is not a guarantee of future results. View our current model portfolios [here](https://www.sharebuilder401k.com/services-investments/model-portfolios/). ## Which Is Better: a Model Portfolio or a Target Date Fund? The choice depends on your personal situation. This chart helps summarize the key differences: | Features | Model Portfolios | Target Date Funds | | ---------- | ---------- | ---------- | | Customization | High – enables user to pick the model that best aligns with their risk tolerance and time horizon, typically 5-7 options from stable to aggressive | Low – one-size-fits-all for the target date a user selects | | Ease of Use | Simple – select from the model that best aligns with your goals | Very simple – pick the date you want to retire and you’re done | | Transparency | Transparent – funds, allocation, costs, time horizon, and risk goals are spelled out | More opaque – user will need to dive in the fund sheet and/or prospectuses to understand asset allocation and how it adjusts over time | | Expenses | Lower – usually made with ETFs and/or index mutual funds, and there may not be an added investment management expense vs building your own portfolio | Higher – typically include multiple layers of management fees and contain funds of funds | | Rigor to Manage Investment Risk | High – designed to manage risk in line with varying time horizons with clear asset allocation, but requires you to review your selection over time | Medium to low – history of being more aggressive than prudent as the fund approaches its target date | ## What to Look for When Selecting a Model Portfolio or Target Date Fund? The best model portfolios and target date funds are built with index funds, often [exchange traded funds](https://www.sharebuilder401k.com/blog/why-etfs-are-a-great-fit-for-401k-plans/) (ETFs), versus those consisting of actively managed mutual funds. Using index funds almost always keeps the fund expenses [lower than other options](https://www.sharebuilder401k.com/why/index-fund-advantage/), enabling more of your money to stay invested in the markets and grow over time. Look for expense ratios ranging from 0.03% to 0.10%. Model portfolios typically display their fund composition and how it varies from stable to aggressive, so you can get a real sense of how risk is managed and the investments that can drive your returns. Target date funds will likely take some digging in the prospectus or fund report to uncover how they are composed, and how they plan to adjust the asset allocation as time passes. It’s important to understand this so that you are comfortable with the funds selected. Lastly, if you select a model portfolio, it’s important to ensure auto-rebalancing is in place (may need to be turned on). This way your investments stay aligned with your risk tolerance. ## The Bottom Line for Retirement Investors Target date funds and model portfolios both simplify retirement investing by diversifying your money and managing your retirement portfolio for you. Choosing between a target date fund and a model portfolio comes down to how much customization and transparency you want and what may be available in your 401(k) plan. Target date funds follow a preset path tied to a retirement year, but can come with unexpected costs and risk. Model portfolios give you a clearer view of risk, time horizon fit, and a strategy that reflects your goals, but require occasional oversight. Both can help you build long-term wealth, and both have their own strengths and drawbacks. If you are unsure which direction makes the most sense, our [retirement experts](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) can help walk you through your options. ---

The Best 401(k) Plans for Small Businesses

When small business owners decide to set up a retirement plan, they’re often surprised by how many types there are, and can have trouble finding the right fit for their business. Learning the overall ins and outs of each type of 401(k) is a good place to start. There are three core 401(k) plan types to consider: a Safe Harbor 401(k), a Traditional 401(k), and a Tiered Profit Sharing 401(k). Here’s the scoop on each. *Note, if you’re self-employed, you’ll want to consider a [Solo 401(k)](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401k Plan Information and FAQs") plan*. __The Safe Harbor 401(k)__ The Safe Harbor 401(k) is a popular choice for businesses with less than 15 employees – and for good reason. These plans allow business owners to contribute the maximum deferral amount to their own account ($23,000 in 2024 or $30,500 for those 50 years of age and over). Plus, they’ll satisfy IRS non-discrimination testing – a governmental check and balance that ensures plans serve all employees and not just a few at the top. The business must provide a relatively small “safe harbor” match or contribution – an amount the employer puts into an employee’s 401(k) account as a percent of an employee’s compensation – so that any employee, including the owner, can contribute the maximum to the plan and receive the match, too. The employer contribution is what helps the business automatically pass government discrimination testing. It’s [tax deductible](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax/ "401k matching is often 100% tax deductible -- how it works") for the business and is also what gives owners and highly compensated employees the ability to maximize tax-deferred contributions without the restrictions, which can be an issue with Traditional 401(k) plans (see below). It’s important to note that the annual government deadline for starting a [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/ "What is a safe harbor 401k plan explained") is October 1, but most providers have internal deadlines a few days to a month earlier to allow time for set-up. If you’re looking to get the most savings and tax protection out of your plan this year, the earlier you start the better. __The Traditional 401(k)__ A Traditional 401(k) enables small business owners to customize their plan. This typically comes down to how the business prefers to reward employees. The company may not be in the position to offer a match at all. Or the business may have highly seasonal income or employees, so offering a regular matching contribution wouldn’t be a good option. Some businesses experience high employee turnover and prefer to use a multi-year vesting schedule for employer matching contributions to encourage loyalty and better manage contribution monies. Others are better off only providing an employer contribution if the business hits its goals. These firms typically reward employees annually with a 401(k) profit share contribution. Traditional plans are typically a good fit for businesses that are highly seasonal or their employees are expected to contribute 7% or more of their salaries. In a Traditional 401(k) plan, employers and highly compensated employees (those making at least $155K in 2024) can contribute 2% more of their salary than the average percent of salary contributed by non-highly compensated employees. So, if the average employee in the business contributes 7% of their salary, the owner will be restricted to contribute no more than 9% of his salary. __The 411 on Matching in a Traditional 401(k)__ It’s important to note that matching is not required with a traditional plan. But when an owner does decide to provide a match, they can choose the percentage and whether to use a vesting schedule. With vesting schedules, the business owner chooses a period of time that a percentage of the employer contributions will officially become the employee’s. For example, an owner could elect to match 3% of contributions made by eligible employees, but it will vest over a three-year period. The owner might also allow for 50% matching contributions to become the employee’s in year one, 25% in year two, and the remaining 25% in year three. In this scenario, 100% of matches are fully vested after three full years. Know that if an employee leaves before fully vested, the unvested amounts are returned to the plan to use for future matching contributions. This is pretty different from Safe Harbor 401(k)s. With a Safe Harbor plan, a 3-4% match is typically required and employer matching contributions are vested immediately, which means it becomes the employee’s money the moment it hits their account. __The Tiered Profit Sharing 401(k)__ And last, but definitely not least, is the preferred plan design for businesses with strong profits and fewer than 50 employees. Sometimes called an [Advanced Profit Sharing 401(k) Plan](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/ "How 401k profit sharing helps businesses lower taxes"), a Tiered Profit Sharing 401(k) rewards employees based on unique employee groups within a company. For example, let’s say a legal firm has three main groups: partners who own the business, front-line attorneys who work on cases, and support staff that handles administrative tasks. Each group is distinct, has differing compensation levels, and is essential to the firm’s success. A different percent of salary can be provided as a profit share to each group as a reward based on their role and performance. This type of 401(k) can be great for firms with this structure and a savvy way for a firm to manage the cost of sharing profits. It’s common for these plan types to also provide a safe harbor employer contribution to pass government tests. So, there you have it – the three most common 401(k) plan types. These options offer great flexibility in aligning a plan with what your business is looking to achieve. *This material is intended only as general information for your convenience and should not in any way be construed as investment or tax advice by ShareBuilder 401k. The owner/participant should consult with their tax advisor regarding any specific tax strategies. This blog has been updated with 2024 limits*

Tax Credits Cover 401(k) Plan Costs for Small Businesses

You may have missed this one, but it’s big news for small businesses working to stay competitive in the labor market, save on taxes, and/or save for retirement! If your company has 1-50 employees and you’ve never offered a 401(k) plan, tax credits can cover your costs dollar for dollar. The recent [Secure Act 2.0 enables tax credits](https://www.sharebuilder401k.com/blog/secure-act-2.0-401k-tax-credits-for-small-business/ "Secure Act 2.0 Tax Credits for Small Business 401(k) Plans") to cover up to $5,000 per year for the first three years of the plan for those small businesses starting their first 401(k) plan. This includes setup and ongoing administration costs. Know that most 401(k) providers will not charge you anywhere near $5,000 per year for [these services](https://www.sharebuilder401k.com/blog/Top_Insights_to_Add_401k_Benefits_for_Your_Business/ "Top Insights to Add 401k Benefits for Your Business"). A business of 10 people might pay $1,000 to $1,500 per year for reference. Also, if your business has 51-100 employees, half of your costs may be covered by tax credits. ## Contribution Tax Credits and Tax Deductions Too Plus, if you decide to provide an employer match, much of this amount can be covered by tax credits, and the rest is deductible for your business. See examples of how both the startup plan credits and the employer contribution credits work [in this article](https://www.sharebuilder401k.com/blog/secure-act-2.0-401k-tax-credits-for-small-business/ "Secure Act 2.0 Tax Credits for Small Business 401(k) Plans"). Lastly, you will likely love the other tax benefits you’ll receive in your personal 401(k) accounts such as lowering taxes via tax deferred savings or saving taxes tomorrow with the [Roth 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "What is a Roth 401(k) and more"). ![Top Tax Reasons to Start a 401k Plan for Your Business](//videos.ctfassets.net/wsuay9fbp17w/46PYB4upGahQlqqE3QTT0Y/02268fcd2657699f9c9287fa21e88b13/Top_Tax_Reasons_to_Start_a_401k_Plan_for_Your_Business.mp4) We don’t think there has ever been a more affordable time to start a 401(k) plan for your business. --- *Ready to explore your options? [Connect with our experts today](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Connect with our 401(k) experts").* --- *This is not meant to be tax advice. Please consult with your professional tax advisor.*

How 401(k) Profit Sharing Helps Businesses Lower Taxes

__Profit sharing in a 401(k) plan__ allows employers to make discretionary contributions to employees’ retirement accounts. These contributions are tax-deductible for the business and don’t require showing a profit. Using profit sharing helps companies reward employees, support long-term savings, and manage compensation in a tax-efficient way. --- ## How Does Profit Sharing in a 401(k) Work? The 401(k) profit sharing employer contributions are 100% tax deductible up to 25% of total compensation of the entire company.^* These contributions aren’t subject to Social Security or Medicare taxes, creating an efficient tax-saving structure for businesses and employees. If you do $100,000 in profit sharing, you’ve likely lowered your taxable income by that same amount. For you and your employees, it’s a bonus with tax benefits. You boost employees' retirement accounts without increasing their taxable income. This could be worth more to employees literally and figuratively than a similar after-tax bonus. ## Tax Advantages of Profit Sharing vs Awarding a Bonus | Item | Profit Sharing | Bonus | | ---------- | ---------- | ---------- | | 1. Is an added labor & benefits expense that lowers net income of the business and therefore taxes? | Yes - cost of labor expense lowers net income/taxes. | Yes - same. | | 2. Is a tax deductible expense for the business? | Yes - can be deducted, typically by 100% of the amount.¹ | Yes - if ordinary, necessary, and a reasonable amount. Cannot be viewed as a gift. | | 3. Is tax-deferred and offers lower personal taxable means for employees, including owners and C-Level personnel? | Yes – is awarded pre-tax to employees ensuring no additional tax burden for individuals this year. No Social Security or Medicare amount is withheld either. | No - Typically 22% will be withheld on bonuses plus Social Security and Medicare rates. | | 4. Is available to spend now? | No. You generally can’t access these funds without penalty until age 59½.¹ | Yes – like any paycheck, it’s available the day it clears at your bank. | ^{¹Assets withdrawn before age 59 ½ may incur a 10% tax penalty.} ## Profit Sharing Example for a 10-Employee Business Let’s look at how the tax difference impacts the business and a C-level individual. Let’s say the company is a C-Corp of 10 employees and has __$69,000__ in profits to distribute to the team. In offering a bonus or profit share, this amount will be added to your labor & benefits expense. So, at a 21% corporate tax rate, this lowers net income by $69,000 and __saves $14,490 in taxes__ ($69,000 * 21% = $14,490). For profit sharing, the most popular form tends to be the same percentage, or pro rata, profit sharing. The same percentage of salary is used to determine the contributions to every employee in the firm, and that money then goes directly into their 401(k)/profit sharing account. In this 10%-for-everyone example, your company pays $690,000 in total compensation for the entire team. There’s a $69,000 profit award pool for 10 total employees (including yourself). Here's how that breaks down: | Group | Payroll | Calculation | Contribution | | ---------- | ---------- | ---------- | ---------- | | 1 Owner | $150,000 | $150,000 x ($69,000 / $690,000) | $15,000 | | 9 Employees | $540,000 | $540,000 x ($69,000 / $690,000) | $54,000 ($6,000 each) | ## Company Tax Benefit | Tax Rate | Tax Savings | Net After-Tax Cost | | ---------- | ---------- | ---------- | | 21% | $69,000 × 21% = $14,490 | $69,000 − $14,490 = $54,510 | In the simple 10%-for-everyone example, __$69,000 of company profit is distributed__ through the 401(k). This amount is __tax-deductible__ to the company and __does not count as taxable income__ to employees until withdrawn at retirement. ## The Profit-Sharing Amount Can Double In 10 Years and Quadruple in 20 Years The $15,000 received by the business owner in profit sharing has the opportunity to grow tax-free until withdrawn in retirement. Using the [Rule of 72](https://www.sharebuilder401k.com/blog/how-the-rule-of-72-helps-you-understand-how-your-savings-can-grow/) and assuming a 7% annual return, $15,000 would double to $30,000 in 10 years and could grow to $60,000 in 20 years. And remember, another benefit of investing in a [tax-deferred account](https://www.sharebuilder401k.com/blog/how-a-401-k-can-help-you-save-on-taxes/), is that dividends, interest, and capital gains are not taxed while in the account versus using a general investing account. ## How Profit Sharing Helps Business Owners Save on Taxes Using this example of a $15,000 award, the CEO would net about __$10,552__ after taxes from a __$15,000 bonus__, versus the full __$15,000__ in a profit sharing contribution: | Item | Profit Share Taxes² | Bonus Taxes² | Personal Tax Saving Advantage of Profit Sharing vs Bonus | | ---------- | ---------- | ---------- | ---------- | | Current Year Federal Income Tax | $0 – no taxes | $3,300 in taxes (22%) | $3,300 | | Medicare Withholding | $0 – no withholding requirement | $218 (1.45%) | $218 | | Social Security Tax | $0 - no social security tax | $930 (6.2%) | $930 | | Total | $0 | $4,448 | $4,448 - CEO receives $10,552 (after taxes) of the $15,000 bonus | ^{²CEO’s tax saving amount is calculated based on the 2025 tax schedule for married filing jointly for income of $150,000 - one receiving $15,000 in profit sharing and one with a $15,000 bonus. Actual tax savings will vary based on your earnings, tax schedule/brackets, and other deductions or credits you may qualify for.^{## How Profit Sharing Helps the Self-Employed Save on Taxes

The 401(k) profit sharing component is also popular with the self-employed who have a Solo 401(k) plan. With a Solo 401(k) plan you are both the employer and employee and can contribute up to the [maximum contribution limit](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/) into your 401(k). That could make a big dent in your taxable income, and maybe help you drop a tax bracket.

Depending on your business entity type (sole proprietorship, LLC, or corporation), you will want to consider your saving and tax goals. Sole proprietors can typically contribute up to 20% of their net Schedule C ([the IRS provides resources for this](https://www.irs.gov/retirement-plans/one-participant-401k-plans)), and most other business entities can contribute up to 25% of W-2 earnings. Keep in mind that anything contributed during the calendar year as an employee is separate from this calculation, but the employee amount still applies towards your overall maximum contribution limit. Your tax advisor or accountant will be a great resource to help you finalize your approach and manage income and contribution limits.

## Profit Sharing Contribution Deadlines
You have until your business tax deadline to make a profit sharing contribution for the previous year; however, you will want to decide if you will make a profit share and the amount well in advance to coordinate with your provider (e.g. first part of January typically works). Your deadline to make the actual contribution will vary by your business type.

## When to Add Profit Sharing vs an Employer Match

| Goal or Situation | Use Profit Sharing | Use Employer Match |
| ---------- | ---------- | ---------- |
| Encourage employee saving | Doesn’t require employees to contribute | Match motivates employees to contribute |
| Reward employees for strong company performance | Flexible — can be added in profitable years | Match is ongoing, not tied to profits |
| Maximize owner and leadership retirement savings | Can add up to 25% of comp (up to IRS limits) for owners | Limited to employee deferral + match |
| Reduce taxable income in a high-profit year | Larger deductible contribution lowers company taxes | Limited tax impact |
| Retain and reward staff across all levels | Excellent tool for retention; can reward tenure or key roles | Easy-to-understand incentive |

Profit sharing and employer matching are two powerful tools to motivate your team and improve retention. When your business has extra cash flow, profit sharing rewards all eligible employees while lowering taxes and building long-term savings. Employer matching provides a steady, easy-to-understand benefit that keeps employees engaged in saving for retirement. And if you can do both, it’s a win for your employees and your bottom line.

## 401(k) Contribution Comparison: Profit Sharing vs. Employer Match vs. Safe Harbor

| Feature | Profit Sharing | Employer Match | Safe Harbor Match |
| ---------- | ---------- | ---------- | ---------- |
| When it’s given | At employer’s discretion, usually annually | Each payroll or year-end | Each payroll or year-end (required annually if plan uses Safe Harbor) |
| Typical formula | % of pay (e.g., 5–10%), same for all or weighted by role/age | % match of employee deferral | Safe Harbor Match or nonelective |
| Employer flexibility | High, can change yearly | Moderate, can adjust but employees expect consistency | Low, must be funded to keep Safe Harbor status |
| Helps pass IRS nondiscrimination testing | No (testing applies) | No (testing applies) | Automatically passes testing |
| Tax deduction for company | Yes, deductible as a business expense | Yes | Yes |
| Vesting options | Flexible (can use graded or cliff) | Flexible | Must be 100% immediately vested |
| Best for companies that... | Want flexibility, tax deductions, and owner-focused savings | Want to encourage employee saving with moderate cost | Want simplicity, automatic IRS compliance, and employee goodwill |

If we add [Safe Harbor](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/) contributions to the mix, you can see that profit sharing still serves as a tool to reward eligible employees while lowering taxable income. However, Safe Harbor contributions, as compared to regular employer matching, ensures that a company’s 401(k) automatically satisfies [IRS compliance testing](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/) requirements and encourages employee contributions with a simple formula.

## Other Profit Sharing Insights

Profit sharing can be structured in several ways—by flat dollar amount, salary percentage, or advanced tiered designs. Speak with a plan specialist to determine the best approach for your team. There are also [Advanced Profit Sharing](https://www.sharebuilder401k.com/overview/best-401k-for-your-business/) options (aka Tiered Profit Sharing) which can help you determine different amounts or percentages by employee groups.

## Conclusion

Profit sharing in a 401(k) plan is a powerful tool for small businesses to lower taxes while offering meaningful retirement benefits. Used strategically, it can enhance employee retention, reduce tax liability, and grow savings for both owners and staff.

---

## Key Takeaways

1. Profit sharing 401(k) plans enable employers to make tax-deductible contributions to employees' retirement accounts.

2. Typically, employer contributions are 100% tax deductible up to 25% of total compensation of the entire company.

3. Profit sharing contributions are not subject to Social Security or Medicare taxes.
4. Business owners (including self-employed individuals) can utilize profit sharing to reduce taxable income.

5. Businesses have until their tax deadline to make profit-sharing contributions for the previous year, offering a retrospective tax-saving opportunity.

---

^{^*Employer 401(k) and profit sharing contributions are 100% deductible up to 25% of total compensation of all employees. So, a company paying $600,000 in total compensation can deduct up to $150,000 in taxes for the year. Please consult with your tax advisor about your company’s situation.}}}

What is Form 5500? Understanding Filing and Deadlines

Form 5500 is a required annual tax form that collects and reports information regarding the qualification of the 401(k) plan. A good 401(k) provider will provide you with a signature-ready form for you to review and file each year. ## Key Takeaways: 1. Form 5500 reports your 401(k) plan’s financial condition, operations, and compliance status to the IRS and Department of Labor, helping ensure retirement plans follow ERISA and tax rules and working in participants’ best interests. 2. Most employers sponsoring a 401(k) plan must file Form 5500 annually. Small plans typically file Form 5500-SF, while Solo 401(k) plans file Form 5500-EZ once assets reach $250,000. 3. Late or missed Form 5500 filings can trigger significant penalties, including IRS fines of up to $15,000 and Department of Labor penalties of up to $1,100 per day, making timely filing and provider support critical. ## Why the need for the Form 5500? Form 5500 is required for federal agencies to verify that 401(k) plans follow IRS and ERISA rules. The IRS, Department of Labor, and Pension Benefit Guaranty Corporation jointly developed the 5500-series forms for employee benefit plans. The purpose is to create a clear means to satisfy the Internal Revenue Code needs as well as satisfy the rules within the Employee Retirement Income Security Act (ERISA). The type of 5500 your firm files is based on number of employees, whether your plan is a group plan or a Solo 401(k), and the amount of plan assets. For [self-employed 401(k) users](https://www.sharebuilder401k.com/products-pricing/solo-401k/) (more details below), you may or may not need to file based on the amount of money in your plan. --- *See how [ShareBuilder401k](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) supports small businesses like yours and can help simplify compliance.* --- ## If I sponsor a 401(k) plan, do I have to file Form 5500? Most 401(k) plan sponsors must file a Form 5500 every year. Plans with fewer than 100 eligible participants typically qualify to file Form 5500-SF, a simplified version. Plans with over 100 employees must file the standard Form 5500. Both versions are relatively simple to submit and are filed electronically through the DOL’s site via the [EFAST2 system](https://www.efast.dol.gov/welcome.html) filing. [Solo 401(k) plans](https://www.sharebuilder401k.com/blog/benefits-of-a-solo-401k-plan-for-self-employed-individuals) have separate rules. Owner-only businesses only need to file Form 5550-EZ once their plan assets amount to $250,000 or greater. These can either be mailed in or filed electronically using Form 5500-SF. Solo 401(k) plans can start small, but filing requirements begin once assets cross this threshold. ## Form 5500 Types for 401(k) Plans | Standard Form 5500 | Form 5500-SF | Form 5500-EZ | | ---------- | ---------- | ---------- | | For group 401(k) plans with 100+ participants | For small group plans with fewer than 100 participants | For Solo 401(k) (owner-only) plans | | Includes additional schedules | Simplified reporting | Required once assets reach $250,000+ | | Filed electronically through EFAST2 | Filed electronically through EFAST2 | Can be mailed or filed electronically via 5500-SF | ## When does the form have to be filed? Form 5500 must be filed by the last day of the seventh month after the plan year ends. For example, that means July 31st is the deadline for calendar year plans. You can be granted a 2 ½ month extension if needed by submitting [IRS Form 5558](https://www.irs.gov/forms-pubs/about-form-5558) before the original due date. Staying ahead of deadlines and planning with forethought is especially important when managing compliance tasks. ## What if I forget to file? Missing the Form 5500 deadline without filing for an extension can have significant consequences. The IRS can assess a $25 per day late-filing penalty, up to a maximum of $15,000. The Department of Labor’s penalties can be even higher, reaching up to $1,100 per day with no maximum limit. ## Will my 401(k) provider assist me with Form 5500? Not all 401(k) providers prepare a signature-ready Form 5500 as part of their service, or charge fees for it as an add-on. Without provider support, employers may need to involve accountants or [third-party administrators](https://www.sharebuilder401k.com/blog/what-is-a-tpa-for-a-401-k/) each year to ensure that they remain compliant. Solo 401(k) providers vary widely, and many other low-cost options do not include such support, so it is important to understand what your provider handles before signing up. --- *Ready to simplify your annual filing? All ShareBuilder 401k plans offer a [signature-ready Form 5500 and automate compliance](https://www.sharebuilder401k.com/services-investments/overview/). See how [ShareBuilder 401k](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) makes Form 5500 and support easy and affordable.* --- ## FAQs ### __What is Form 5500 used for?__ Form 5500 is used to report the financial condition and operations of your 401(k) plan. It helps the IRS and DOL monitor compliance with ERISA and tax rules, ensuring that retirement plans are being managed properly for the benefit of participants. ### __Who must file Form 5500?__ Most employers who sponsor a group 401(k) plan must file annually. Smaller plans with under 100 participants typically use Form 5500-SF, while larger plans with 100 or more participants file the full Form 5500. Solo 401(k) plans file Form 5500-EZ once assets reach $250,000. ### __What happens if I file Form 5500 late?__ Late filings can result in penalties. The IRS may charge $25 per day up to $15,000, while the Department of Labor may charge up to $1,100 per day. Filing on time and requesting extensions when needed can help avoid these unsavory consequences. ### __Do Solo 401(k) plans always have to file Form 5500-EZ?__ No. Solo 401(k) plans only need to file Form 5500-EZ when plan assets amount $250,000 or more. No annual filing is required before that. ### __Can my 401(k) provider file Form 5500 for me?__ Your 401(k) provider may be able to prepare a signature-ready Form 5500, but they do not submit it on your behalf— the plan sponsor must do the actual submission. Provider support makes the process easier by ensuring the form is accurate and complete before you file.

Solo 401(k) Deadlines

Solo 401(k) contribution and plan establishment deadlines vary based on if you are contributing as an employee, an employer, and/or are setting up your first 401(k) plan. Plus, both contribution and plan setup deadlines vary by the business structure of your company (e.g., Sole Proprietor, Partnership, LLC, or Corporation). Knowing these differences helps you maximize your tax benefits within your self-employed 401(k) plan. --- ## Key Takeaways - Self-employed and owner-only businesses may receive [401(k) benefits](https://www.sharebuilder401k.com/overview/401k-saving-advantages/) by starting a Solo 401(k) plan. - Small business owners are both the employee and the employer, so they can contribute to their 401(k) plan as both. Different deadlines may apply based on your business structure. - Sole Proprietors and Single-Member LLCs can typically start a plan and make employee and employer contributions up to their tax deadline. Double check with your provider for exact dates. - Partnerships, Corporations, and Multi-Member LLCs may make employee contributions up until 12/31 of the current calendar year, and employer contributions until their business tax deadline (assuming a calendar fiscal year). --- ## How Does a Solo 401(k) Work? Self-employed or owner-only businesses with no full-time employees can start a retirement plan called a [Solo 401(k)](https://www.sharebuilder401k.com/products-pricing/solo-401k/), also known as an Individual 401(k) plan. This includes multi-owner businesses. Solo 401(k)s are great in that you are both the employee and employer, so you can contribute up to the [annual maximum contribution limits](https://www.sharebuilder401k.com/blog/401k-contribution-limits) as both. That’s a lot to put away for a comfortable retirement and [might just drop you a tax bracket](https://www.sharebuilder401k.com/blog/how-the-self-employed-can-save-up-to-70000-from-taxes-with-a-solo-401k/). --- > Curious about how much you can contribute? Try our [contribution calculator](https://www.sharebuilder401k.com/help/solo-401k-contribution-calculator) to estimate your Solo 401(k) contribution amount. --- ## What are 401(k) Employee and Employer Contributions? It is important to understand the two overarching types of 401(k) contributions you can make as an owner-only business, so you can maximize your contributions and tax advantages. ### Employee Contributions (Elective Deferrals) Employee elective deferrals are the type of contribution you can make __as the employee__ of your business. There are [two main employee contribution types](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/): - Pre-tax (traditional) - Post-tax (Roth) Each type is taxed differently in the current year and upon withdrawal in retirement. It’s a good idea to consult with a tax professional and also double check that your provider allows Roth contributions before making employee elective deferrals. Remember, you can set aside money in your 401(k) up to the employee maximum contribution limit. ### Employer Contributions (Profit Sharing) Employer contributions, aka [employer profit sharing contributions](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes), allow you to contribute as an employer up to the IRS annual contribution limit. You can generally contribute up to __25% of your W-2 compensation__ (or for Sole Proprietors, ~20% of net self-employment income). Note that profit sharing contributions must always be made pre-tax and are 100% tax deductible. ## Solo 401(k) Plan Deadlines | __Business Entity Type__ | __Employee Contributions Deadline__
_{(Pre-tax/ Roth/ catch-up) | __Employer Contributions Deadline__
_{(Pre-tax only) |
| ---------- | ---------- | ---------- |
| Sole Proprietors and Single- Member LLCs | 4/15/2026 to fund | 4/15/2026 to purchase and fund |
| C-Corps and Multi-Member LLCs taxed as C-Corps | 12/31/2025 to purchase and fund | 4/15/2026 to fund |
| S-Corps, Partnerships, and Multi-Member LLCs taxed as S-Corps or Partnerships | 12/31/2025 to purchase and fund | 3/16/2026 to fund |

*Please note that your Solo 401(k) provider will often have purchase and contribution deadlines earlier than the government deadline to ensure your plan is set up to receive qualifying contributions. It can take days to weeks for providers to set up your plan, so plan on purchasing well in advance.*

## Can You Start a Solo 401(k) and Contribute Within the Year?

If you are self-employed and starting your first Solo 401(k), you can start your plan up until your tax deadline and still make contributions as an __employer__.

- For most business types, this date is April 15th.

- For S-Corps and Partnerships, this date is March 15th.

However, the dates can be different for contributions as an __employee__.

- For Sole Proprietorships and Single-Member LLCs, this date is April 15th.

- For most other business types, this date is December 31st.

Note: Only Sole Proprietorships and Single-Member LLCs can start a Solo 401(k) plan after December 31st and still make employee contributions for the prior year.

However, not all providers let you start a 401(k) plan and contribute up to the IRS deadline. Make sure to check with your provider.

## How Solo 401(k) Contribution Deadlines Work

You are both the employee and employer of your Solo 401(k), so different deadlines and amounts apply for each type of contribution.

A good 401(k) provider will make it easy to understand the difference between employee and employer contributions. This helps you avoid going over the maximum limit for each type. They’ll also stay up to date on any new legislation that might affect your deadlines or contribution rules, such as [Secure 2.0](https://www.sharebuilder401k.com/blog/secure-2.0-overview/).

---
> Confused? Our 401(k) experts can walk you through employee/employer contributions and how to set them up for your 401(k) plan. [Just give them a call](https://retire.sharebuilder401k.com/ShareBuilder401kBlog).
---

Sole Proprietorships and Single-Member LLCs can make both employee and employer contributions until 4/15, if their provider allows.

S-Corps, C-Corps, Partnerships, or Multi-Member LLCs need to set up their plans and make employee contributions by 12/31, if their provider allows. Employer contributions can typically be made by the tax deadline, typically either in March or April.

## Managing Your Solo 401(k) Contributions

Solo 401(k) owners typically have the flexibility to make contributions on any given business day. Many choose to set up [automated contributions](https://www.sharebuilder401k.com/blog/automatic-investing-how-it-helps-build-your-retirement/) to help them save more consistently and better manage their cash flow. Then, after each quarter or at year end, you can make one-time employer contributions as you understand your business income, savings, and tax management needs for a given year.

Making contributions throughout the year also has a side benefit called [dollar cost averaging](https://www.sharebuilder401k.com/blog/how-automatic-investing-dollar-cost-averaging-helps-you-in-good-time-and-bad/), which can help build more wealth.

In determining how much you can contribute as an employer, it is typically 25% of W-2 income, around 20% of your net schedule C, or the IRS tax table for your entity type. Generally, it will be 20%-25% of your earnings up to the [max contribution limit](https://www.sharebuilder401k.com/blog/401k-contribution-limits). You can always contribute up to the employee contribution limit as long as you earn at least that amount.

Finally, if your business is run on a non-calendar fiscal year, plan establishment date deadlines may vary by 401(k) providers. Most businesses choose to run their plan on a calendar year regardless of their fiscal year given annual contribution rule changes and ease of management.

If you’re looking to start a new Solo 401(k), [talk to our team](https://retire.sharebuilder401k.com/ShareBuilder401kBlog) and we can help you choose the right product that works for you.

---
## FAQs
---

### What are the two types of Solo 401(k) contributions?

Solo 401(k) plans allow two contribution types:
- __Employee Elective Deferrals__ (the amount you contribute as the “employee”)
- __Employer Profit Sharing Contributions__ (the amount you contribute as the “employer”)

### When are Employee Elective Deferrals due?

Thanks to SECURE Act 2.0, Sole Proprietors or Single Member LLCs can contribute as an employee up to the April tax deadline.

For all other business types, deferral elections must be made by 12/31.

### When are Employer Profit Sharing Contributions due?

Employer contributions must be funded by your business tax return deadline.

The exact date depends on your business structure:
- __Sole Proprietors / Single-Member LLCs taxed as Sole Prop__: April 15 of the following year (or October 15 with extension)

- __S-Corps, Partnerships, Multi-Member LLCs taxed as S-Corps/Partnerships__: March 15 (or September 15 with extension)

- __C-Corporations or LLCs taxed as C-Corps__: April 15 (or October 15 with extension)

### Do I need to have my Solo 401(k) opened before making contributions?

Yes. To make employee deferrals for the year, your Solo 401(k) must be established by December 31. Employer contributions can still be made later, as long as you are within your tax-filing deadline.

### Can I change my contribution amounts after year-end?

__Employee deferrals__: No. The election must be in place by December 31.

__Employer profit sharing__: Yes. Amounts can be determined and funded up to your tax deadline.

### What happens if I miss the deadline?

If you miss:

- __Employee deferral deadline__: You cannot retroactively make deferrals for that year.

- __Employer contribution deadline__: You cannot deduct the employer contribution for that tax year. If you file an extension and you miss the extended deadline, you cannot deduct them for that tax year. Consult your tax advisor for more information.

*This is not meant to be tax advice. ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.}}

When Can You Withdraw From Your 401(k)? | ShareBuilder 401k

You can withdraw from your [401(k)](https://www.sharebuilder401k.com/overview/what-is-a-401k/ "What is a 401(k)?") through standard penalty-free withdrawals at 59 ½, early withdrawals with exceptions, hardship withdrawals, or [401(k) loans](https://www.sharebuilder401k.com/blog/401k-loans-the-good-the-bad-and-the-ugly/ "How 401(k) Loans Work"), though rules and potential penalties vary by option. Withdrawals can provide needed funds today but may reduce your account’s future compounding potential. --- ## Key Takeaways - Always check your plan’s rules and consult with a tax professional when considering a 401(k) withdrawal. - You can withdraw from your 401(k) at age 59 ½ without a penalty. - You can withdraw from your 401(k) before age 59 ½ via early withdrawals, hardship withdrawals, loans, or in-service distributions. Each option requires plan approval and may involve taxes or penalties. - Withdrawing from your 401(k) early can greatly reduce your retirement savings due to lost potential investment growth and compounding.
| __**401(k) Withdrawal Method**__ | __**Pros**__ | __**Cons**__ | | ---------------------- | --------------------- | ---------------------- | | After age 59 ½ |

Most straight-forward

No 10% penalty

Must wait until later in life

Can require in-service distributions if you are still working (see below)

| | Early Withdrawal |

Can allow for flexible withdrawal before age 59 ½

Can avoid the 10% penalty if you meet an IRS exception

Typically incurs a 10% penalty

Not all 401(k) plans allow for IRS exceptions

| | 401(k) Loan |

Lets you borrow 50% of your savings (up to $50,000) of your own 401(k) plan vs a bank or other creditor

Repayment plan is relatively generous

Avoids the 10% penalty

Can hurt long-term 401(k) balance growth

Must be paid off within 5 years

30-60 day required repayment period if you leave your job

If you miss a payment, it's automatically treated as an early withdrawal

Not all 401(k) plans allow loans

| | Hardship Withdrawal |

Allows you to access funds in an emergency

Can avoid the 10% penalty if you qualify for an IRS exemption

Must match an IRS-approved reason

Typically incurs a 10% penalty

Requires forms proving you have no other financial options

Not all 401(k) plans allow hardship withdrawals

| | In-service Distribution |

Lets you withdraw from your 401(k) while you are still working and over age 59 ½

Can help rollover funds to a retirement plan with more investment options, lower fees, or different withdrawal strategies

Can be a complicated process requiring a tax professional

Not all 401(k) plans allow in-service distributions

| ## At what age can you withdraw from a 401(k) without penalty? Once you reach age 59 ½, you can start taking money out of your 401(k) without facing the 10% penalty for early 401(k) withdrawal. Just know that you will owe income taxes on pre-tax contribution withdrawals, while [Roth 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "What is a Roth 401(k)?") withdrawals (earnings and all) are tax-free. Early planning of your 401(k) withdrawals helps [manage taxes](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/ "Tax Reasons to Start a 401(k)") and preserve retirement growth. However, if you are still working, you will need to see if your company's plan allows for what is called in-service distributions. If your plan does allow for these, you can withdraw funds from your 401(k) account. However, it’s usually best to leave 401(k) funds untouched while working to allow your investments to grow. ## 401(k) Early Withdrawals It is possible to access your funds before age 59 ½, but it almost always comes at a cost. In most circumstances, early withdrawals are subject to a 10% penalty on top of regular income taxes. However, the [IRS has exceptions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions "IRS | Exceptions to tax on early distributions") to this rule. You may be able to avoid the penalty if: - You become permanently disabled - You leave your job at age 55 or older (Rule of 55) - You need funds for certain qualified medical expenses if the unreimbursed medical expenses exceed 7.5% of your adjusted gross income and you do not itemize your taxes These exceptions fall under in-service distributions, and their availability can vary widely depending on your 401(k) plan. Be sure to check with your plan administrator to determine if they are an available option. Also, if you happen to die, the money going to your beneficiaries will not be subject to the 10% penalty. ### Rule of 55 The 401(k) Rule of 55 is a separate IRS rule that lets you take penalty-free withdrawals from your 401(k) if you leave your job in or after the year you turn 55 (or age 50 for certain public safety workers). The Rule of 55 only applies after you have left your job, not while you are still working. A few other items to keep in mind: - Applies only to the 401(k) at the job you just left—not previous plans or IRAs - Regular income taxes still apply, but the 10% early withdrawal penalty is waived - You must leave your job in the calendar year you turn 55 or later (50 for public safety roles) - You can take only what you need and can take multiple withdrawals over time, not just a one-time lump sum (if your plan allows it) - Your specific 401(k) plan must allow early withdrawals, so check with your plan administrator ## 401(k) Loans A 401(k) loan allows you to borrow up to 50% of your vested 401(k) account balance with a $50,000 cap. You then pay yourself back at the interest rate of [Prime](https://www.investopedia.com/terms/p/primerate.asp "Investopedia | Prime Rate Definition") plus 1% over a 5-year period, typically through an automatic payroll deduction. This provides access to funds without early withdrawal penalties, though not all 401(k) plans allow loans. If you stay on schedule with repayments and follow the 401(k) loan rules, you will not owe any taxes or penalties. However, there are a few risks to consider: - The money you take out for a 401(k) loan will not be invested while it is out of your account, which could slow your savings growth - If you quit or lose your job, the outstanding 401(k) loan amount is typically due within 30-60 days - If this happens, it may be treated as a taxable distribution and subject to a 10% early withdrawal penalty if you are under age 59 ½
--- *For small business owners, choosing a 401(k) that allows low-cost loans provides financial flexibility. [Get in touch to explore your options. ](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Start a Quote for a 401(k) Today")* --- ## 401(k) Hardship Withdrawals A hardship withdrawal lets you access 401(k) funds for an immediate and heavy financial need. To qualify, the withdrawal amount cannot exceed your need, no other financial options exist, and it must match an [IRS-approved reason](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions "IRS | Hardship Distributions"). The amount you take out is taxed as regular income, and a 10% early withdrawal penalty applies if you are under age 59 ½, unless your situation also qualifies for a separate IRS penalty exception. The IRS allows hardship withdrawals for specific reasons including: - Medical expenses for you, your spouse, or dependents - Costs for first time homebuyers - Tuition and education related fees - Payments to prevent eviction or foreclosure - Funeral or burial expenses - Certain expenses to repair damage to your primary residence (such as from a natural disaster) The process involves completing a self-certification form, often through your plan's online portal, and you may be required to provide and retain documentation for potential future audits. It is always a good idea to consult with a tax professional to determine what applies to your specific situation. Not all 401(k) plans will offer hardship withdrawals, so it is best to also check if your 401(k) provider offers this option. ## 401(k) In-Service Distributions An in-service distribution allows you to access funds from your 401(k) while you are still working. While it can be useful in certain situations, it is not always available and is subject to your plan’s specific rules. Here is what to know: - __What it is:__ A withdrawal from your 401(k) while you are still working for your employer. - __Common types:__ After age 59½ (although some plans allow for pre-59½), vested employer contributions, or from certain older account balances (these may include funds you rolled over from another 401(k) plan, assets covered by outdated plan rules, or contributions that have been in the account for many years). - __Why people use it:__ Often to roll funds into an IRA for more investment options, lower fees, or different withdrawal strategies. Not all plans allow for in-service distributions. Availability depends on your specific 401(k) plan rules, and you will want to confirm availability before formally pursuing any specific in-service distribution type. ## Before Cashing Out Your 401(k) Withdrawing from your 401(k) early can greatly reduce your retirement savings due to lost investment growth and [compounding](https://www.sharebuilder401k.com/blog/what-is-compounding-and-how-it-helps-your-money-grow/ "What is compounding?") over time. And that’s before any potential 10% withdrawal penalties or income tax! If facing financial hardship, consider other options first such as emergency savings, loans, or other assistance programs. Before withdrawing early, it is smart to talk with a tax professional or financial advisor. Understanding your 401(k) plan rules and the long-term impact of taking money out early can help you avoid costly mistakes and keep your retirement goals on track. --- *Your 401(k) is designed for your future – so it is best practice to treat it as an absolute last resort. [Talk to our team today](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Get a Customized Quote for Your Business") to find a 401(k) plan that provides flexibility while protecting your future savings.* ---
ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies. Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can limit your future retirement funds.

What is a TPA for a 401(k)? | ShareBuilder 401k

A Third Party Administrator (TPA) for a [401(k) plan](https://www.sharebuilder401k.com/overview/what-is-a-401k/ "What is a 401(k)?") is a service provider that manages administrative, compliance, and government reporting duties. By handling these complex tasks, a TPA helps employers save time, reduce risk, and keeps their retirement plans running smoothly. ## What Does TPA Stand For? TPA stands for “third party administrator.” A TPA helps employers handle 401(k) compliance testing, filings, and plan design, ensuring the retirement plan stays in good standing. When it comes to your 401(k), a TPA typically provides administration services that are included in the purchase of a 401(k) plan. They can be bundled with your 401(k) recordkeeper, payroll solution, or hired as a third party for preparation of IRS testing and the [Form 5500](https://www.sharebuilder401k.com/blog/what's-a-form-5500/ "What's a Form 5500?"). The primary role of a TPA is to ensure your retirement plan follows regulations as outlined in the [Employee Retirement Income Security Act of 1974 (ERISA)](https://www.sharebuilder401k.com/blog/what-is-an-erisa-3-38-advisor/ "What is a ERISA 3(38) Advisor?"). ### Why TPAs Matter in Retirement Plans There is a lot that goes into the management and upkeep of a 401(k). While many 401(k) providers handle services such as customer service, fiduciary responsibilities, and investment selections, the administration aspect of a retirement plan can be covered by an administrator who specializes in those solutions. This typically includes designing plan documents, preparing employer and employee benefit statements, tracking employee eligibility and participation, calculating 401(k) loan provisions, performing compliance testing, generating annual reports required by the IRS, and more. ## The Role of a Third Party Administrator (TPA) in 401(k) Administration ### Behind the Scenes: How TPAs Support Employers TPAs help make it easy to set up and manage a 401(k) plan. They provide regulatory documents required by the IRS and simplify uploading and downloading employee payroll information. TPAs serve as the online tool to keep track of 401(k) tasks and requirements. TPAs manage essential 401(k) plan tasks, including conducting [discrimination tests](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/ "What is 401(k) Plan Testing?"), updating plan documents, handling employee eligibility, and ensuring compliance with vesting schedules. They also provide a signature-ready IRS Form 5500, streamlining the process of meeting government requirements. ### Compliance, Testing, and Plan Administration Companies that sponsor a 401(k) plan are responsible for staying compliant with IRS rules and regulations. This includes annual non-discrimination testing to ensure the plan treats all employees fairly. There are two tests called Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) that must be satisfied to ensure your plan is compliant. The good news is that most Third Party Administrators (TPAs) handle these compliance requirements for you and help you with any corrections or adjustments needed. This helps keep your plan in good standing and reduces the risk of costly mistakes. ## TPA vs Recordkeeper vs Advisor ### Who Does What in a 401(k) Plan? You may hear the terms 401(k) third party administrator, recordkeeper, and financial advisor thrown around without understanding the differences. Together they support the overall management of a retirement plan, with each responsible for specific tasks. | __Role__ | __What They Do__ | __Key Responsibilities__ | |--------------------------|----------------------------------------------|-----------------------| | **TPA (Third Party Administrator)** | Handles 401(k) plan compliance and administration | - Compliance testing (ADP/ACP, top-heavy, etc.)
- Drafting & maintaining plan documents
- Filing Form 5500
- Ensuring plan follows IRS & DOL rules
- Employee eligibility and participation
- Monitors vesting schedules, supports loan provisions, and calculates RMDs | | **Recordkeeper** | Manages the data and accounts for the 401(k) | - Tracks participant balances
- Processes and tracks contributions, loans, and withdrawals
- Provides participant website/portal
- Provides plan sponsor website/portal
- Supports plan design, investments offered, and employee enrollment
- Generates statements | | **Financial Advisor** | Provides guidance and investment advice | - Helps select or determines the investment lineup
- Advises employer on or satisfies the fiduciary duties regarding the investment offering
- Offers participant education & support
- May act as a fiduciary advisor (ERISA 3(21) or ERISA 3(38) advisor) | ## Benefits of Working with a TPA ### Expertise in Plan Design and Compliance A TPA brings knowledge of IRS and DOL regulations, ensuring your 401(k) plan is designed correctly and remains compliant year after year. They also run critical tests, like non-discrimination testing, to make sure your plan works in the best interests of all employees. ### Fiduciary Protection and Risk Management By managing complex administrative and compliance tasks, TPAs help reduce the employer’s risk of errors or penalties. This extra layer of oversight gives plan sponsors added protection and peace of mind. ## Do You Need a TPA for Your 401(k)? ### When a TPA is Essential For most businesses offering a 401(k) plan supporting a number of employees, a TPA is invaluable. Managing the complexities of a retirement plan on your own can be both time-consuming and overwhelming—especially with regulations that change year after year. As described, TPAs handle compliance testing, filings, and plan design, ensuring your retirement plan meets IRS and DOL requirements while aligning with your company’s goals. ### Bundled Solutions While you can start a 401(k) and integrate with a TPA separately, many 401(k) providers offer [bundled solutions](https://www.sharebuilder401k.com/services-investments/overview/ "Services and Investments Overview") that include administration, recordkeeping, and investment advising. You simply sign up for a 401(k) with that provider, and everything else is included typically with a fixed monthly fee for employers and a per-participant or asset-based fee for employees. This makes starting and managing a retirement plan for you and your employees simpler and [more cost-effective](https://www.sharebuilder401k.com/blog/how-to-assess-and-compare-401k-plan-costs/ "How to Assess and Compare Plan Costs") than trying to figure out everything separately. ## Conclusion A 401(k) plan is one of the most valuable benefits you can offer employees—but it also comes with rules, paperwork, and responsibilities. A Third Party Administrator (TPA) helps simplify the process by handling compliance, plan design, and oversight, allowing you to focus on running your business. TPAs are just one part of the process of setting up and managing a 401(k). You’ll need to consider the other aspects of running a 401(k), such as payroll integration, [investment options](https://www.sharebuilder401k.com/services-investments/etf-lineup/ "Investment Options"), and employee contributions. By understanding the roles of the TPA, recordkeeper, and advisor, you'll be better equipped to choose the right 401(k) solution for your business. Whether you prefer to handle the investments and administrative duties yourself, or opt for a bundled retirement solution, the right approach will help ensure your employees are set up for long-term financial success. Ready to simplify your 401(k) administration and ensure compliance with ease? See how ShareBuilder 401k can handle plan design, compliance testing, and recordkeeping—so you can focus on growing your business. __[Explore ShareBuilder 401k today](https://www.sharebuilder401k.com/why/sharebuilder-401k/ "Why ShareBuilder 401k")__ and discover the right solution for your company. ## Key Takeaways 1. A __Third Party Administrator (TPA)__ manages the compliance, administration, government reporting, and plan design tasks for a 401(k), ensuring your retirement plan follows IRS and DOL regulations. 2. __TPAs simplify 401(k) administration:__ Third Party Administrators handle compliance testing, government filings, and plan design, reducing risk for employers. 3. __Different roles matter:__ TPAs, recordkeepers, and financial advisors each have distinct responsibilities, from compliance and administration to investment guidance. 4. __Bundled solutions make 401(k) management simpler:__ Bundled 401(k) providers can combine administration, recordkeeping, and investment services into one package. 5. __Informed decisions lead to success:__ Understanding the roles and benefits of TPAs helps businesses choose the right 401(k) solution, keeping employees on track for long-term financial growth.

What is a Safe Harbor 401(k)?

## Key Takeaways - Safe Harbor 401(k) plans automatically satisfy [non-discrimination testing](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/ "What is 401k plan testing?") rules. - Safe Harbor 401(k) matches are typically 100% tax deductible. ^ - Safe Harbor 401(k) plans allow you to contribute the maximum annual deferral amount ($23,500) to your own 401(k) plan without restrictions. ^^ - Allows you to receive additional savings from your company's matching contributions (you're an "employee" too) - The deadline to start a Safe Harbor 401(k) plan is October 1st, 2024. ## What is a Safe Harbor 401(k)? [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/learn-why-safe-harbor-401-k-plans-are-the-best-fit-for-most-small-businesses/ "Learn why safe harbor 401k plans are the best fit for most small businesses") plans enable small business owners to contribute the maximum amount of their annual income into a tax-deferred retirement account and automatically satisfy government required non-discrimination compliance tests. While some businesses are concerned with the cost of providing a match, it is typically [100% tax deductible](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax/ "401k matching is often 100% tax deductible -- how it works"). It is more of a cash flow consideration for the business of whether to provide a regular matching contribution. The Safe Harbor plan allows you to: - Contribute the [maximum annual deferral](https://www.sharebuilder401k.com/blog/2022-401k-contribution-limits-ira-and-roth-limits-and-more/ "401k contribution limits, IRA limits and Roth IRA limits") amount ($23,500 in 2024) to your own 401(k) plan - Avoid the hassles by automatically satisfying IRS [non-discrimination testing](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/ "What is 401k plan testing?") that all employee-based 401(k) plans must pass ## What are the benefits of a Safe Harbor 401(k)? - Safe Harbor 401(k) plans enable small business owners and any highly compensated employee (those earning over $155,000 per year) to contribute the maximum amount of their annual income into a tax-deferred retirement account without restrictions. If not a Safe Harbor 401(k) plan, owners, and highly compensated employees (HCE) are restricted on how much they may contribute based on the average deferral rate for non-highly compensated employees (NHCE) in the plan. For example, if NHCEs are putting 3% of their salary into the plan, HCEs may only defer up to 2% more, or 5% of their salary into the plan which may be much lower than $22,500 allowed. - __Your business can deduct all [matching contributions](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match/ "Decision - to provide a match or not to provide a match in your 401(k) plan?")__ (Within the [deductibility limitations](https://www.sharebuilder401k.com/blog/2022-401k-contribution-limits-ira-and-roth-limits-and-more/ "contribution limits and income rules for 401k plans and IRAs") imposed by the IRS) to employee accounts. And don't forget, matching contributions help increase employee retention, and are a great recruiting tool for prospective hires. - You automatically satisfy non-discrimination testing. ## Safe Harbor 401(k) Deadlines There are two deadlines to be aware of: 1. The first is in August or September – as it typically takes 401(k) providers a few weeks or more to get this type of plan set up before the government-imposed deadline (some require up to a month). FYI, some providers stop accepting new Safe Harbor 401(k)s 30 to 45 days or earlier from the proposed IRS deadline of October 1st. 2. The second is October 1st, the government-mandated deadline to have a Safe Harbor 401(k) plan in place for a business running a calendar fiscal year. So, get your questions answered and plan purchased before this date if you are ready to start taking advantage of the tax and savings benefits Safe Harbor 401(k)s offer. ## How is a Safe Harbor 401(k) different from other 401(k) plans? By providing a ‘Safe Harbor’ qualifying match – the amount an employer puts into an employee’s 401(k) account as a percentage of an employee’s salary – any employee including the owner can give the maximum to the plan and receive the match. 401(k) plans must be run in the best interest of employees. Frequently, in companies with a traditional 401(k) plan that offer no match, a vesting match, or a lower match than Safe Harbor requirements, the more highly compensated employees (such as owners) are restricted on how much they can contribute to the plan if employees don’t contribute a high enough percentage of their salaries on average to the plan. Essentially the U.S. Government wants to ensure that 401(k) plans do not favor “highly compensated employees” over non-highly compensated employees. The government has established required compliance tests to verify all employees have fair representation in a plan. That’s where the Safe Harbor 401(k) saves the day for businesses that go with this plan type. ## Who benefits the most – business owners or employees – with a Safe Harbor 401(k)? [Both pretty equally.](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/ "Five tax reasons to start a 401k plan") - It lowers personal taxes in the current year for the owner and each employee who make tax deferred contributions. - Owner and employees also benefit from receiving the match. - Your business can report any match as a tax-deductible expense (typically 100% deductible as mentioned above) to minimize this cost to the business for providing retirement plan benefits. If your business has a lot of seasonal workers or uneven income streams that make a Safe Harbor 401(k) difficult to support for your business, there are ways to design Traditional 401(k) plans with auto-enrollment or profit sharing to help ensure you can fully benefit from the plan. ## Any other important info to know? Any business with a headcount below 100 employees and opening their first 401(k) plan can also receive a tax credit up to $15,000. [401(k) tax credits](https://www.sharebuilder401k.com/blog/irs-tax-credits-cover-costs-of-401k-for-small-businesses/) can cover most all a 401(k) provider's costs for three years when starting a 401k plan for your small business.* The credits generally covers 100% of 401(k) set up and administrative costs for businesses with 1-50 employees and half the costs for those with 51-100 employees. Plus, there are tax credits and deductions that may be applied to employer contributions too. As you can see, it doesn’t have to cost much to offer 401(k) benefits for your business. ## How Can We Help? Choosing the right 401(k) plan for your small business can be challenging. Give us a call - we’ll take the time to learn about your business and help you find the right plan to achieve your retirement goals. For more info and FAQs, you can also [visit our Safe Harbor 401(k) page](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "Safe Harbor 401(k) Plans – More Savings, Less Hassle"). Happy saving! ^ Tax & legal advice: ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies. ^^ The maximum contribution for an employee participant in 2024 is $23,500 ($30,500 if 50+ years of age). *View [important disclaimers](http://retirement.sharebuilder401k.com/offer-details-and-disclosures.html "important disclaimers") on price comparison vs. the industry, promotion timing and rules, and how 401(k) tax credits work. This blog was updated with 2024 limits.

What is a Catch-up Contribution Limit?

A catch-up contribution is designed to help individuals who are closer to retirement age save more for tomorrow in tax advantaged accounts like a 401(k) or IRA. Many people get started saving a little late for retirement, and a catch-up contribution can help build a bigger nest egg. For both a 401(k) or an IRA, a catch-up contribution allows those 50 years old and older to make additional contributions to their retirement account. With recent legislation like the [Secure Act 2.0](https://www.sharebuilder401k.com/blog/secure-2.0-overview/ "Secure Act 2.0 Overview"), the amounts and ways people can contribute are evolving. There is now a super catch-up in 401(k)s, and 2025 is the last year those making over $150,000 can make catch-up contributions tax-deferred in either their 401(k) or IRA. ## Key Takeaways - If you're over the age of 50, you can make an annual catch-up contribution of $7,500 in a 401(k) or up to $1,000 in an IRA. This increases the total employee contribution limit to $31,000 in 2025 in a 401(k) and up to $8,000 in an IRA. - If you’re ages 60-63, you can make an annual 401(k) super catch-up contribution of $11,250. This increases the total employee contribution limit to $34,750 in 2025. Workers age 64 or older must contribute at the normal catch-up contribution limit. IRAs do not offer a super catch-up option. - Starting in 2026, workers that earned more than $150,000 in the previous year will need to make all catch-up contributions as Roth (after-tax). This is true for 401(k)s and IRAs. ## What is a contribution limit? Contribution limits are set by the IRS to cap how much employees and employers are allowed to put into tax advantaged retirement accounts. These limits are set to account for inflation, cost of living, and other factors. Retirement catch-up contributions help those ages 50+ set aside more money for their retirement. With many Americans earning high incomes as they age, it’s a feature more can take advantage of to be in a better place financially when they retire. ## What is the new “super” catch-up contribution? As of 2025, individuals using a 401(k) have the option to contribute an even higher amount of money to their retirement account. To qualify, they must be ages 60-63. Once they turn 64, they must revert back to the standard catch-up contribution limit amount. ## How much can I save in my 401(k) in 2025? ![Catchup and super catchup Contribution Flow Chart](//images.ctfassets.net/wsuay9fbp17w/JrIuj7j1bceDYlaPIjZDZ/7fccd93f7930f059a7b8f4685b15345b/Catchup_Flow_Chart_1_.png) The above flowchart helps you identify how much you can contribute to a 401(k) retirement account as an employee in 2025. If you are not yet 50, then you have to follow the standard employee contribution limit of $23,500. If you are over age 50, then your additional contribution limit amount is $7,500, for a total of $31,000. However, if you are ages 60-63, you qualify for the super catch-up, and your catch-up contribution limit rises to $11,250, for a total of $34,750. The catch-up contribution limit reverts back to $7,500 for those ages 64+. If you don’t have access to a 401(k) and are using an IRA, the IRA catch-up contribution is up to $1,000 and there is no super catch-up in IRA. Your earnings will dictate how much you may contribute to an IRA. See the chart and footnote below for the details. ## 401(k) Saving Advantages vs Traditional IRAs The tax advantages for 401(k) savers versus those opting to use IRAs, or those who don't have access to a 401(k) plan, is now even larger. | 401(k) vs Traditional IRAs in 2025 | | | | ----------------------------------- | :-: | :-: | | | __401(k)__ | __IRA__ | | Annual limit per individual | $70,000
(employee + employer contributions) | $7,000 | | Age 50+ catch-up amount | $7,500 | $1,000 | | Age 60-63 catch-up amount | $11,250 | N/A | | Roth income limit | None | $165K* | | Penalty-free access, if needed | Yes, via a loan** | No | ^{*Beginning at $150K, the amount you are allowed to contribute begins to decrease, hitting $0 at $165K for singles (range is $236K to $246K for married couples filing jointly)}
^{**Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can significantly reduce your retirement savings.} ## What is the difference between a Roth 401(k) and a pre-tax 401(k)? | | Roth 401k | Traditional 401k (tax-deferred) | | ------------ | :----------: | :----------: | | Contribution Tax Treatment| You contribute after-taxes; there is no tax benefit in the current year. | You contribute before tax which lowers your current adjusted gross income. You’ll have more take home pay in the current tax year than if you made all Roth 401k contributions. | | Withdrawal Tax Treatment| No taxes on your distributions in retirement. To be IRS qualified, you must have established the Roth 401(k) 5 or more years ago and you are taking the distribution on or after reaching age 59 ½ or due to disability or death.| Your distributions are taxed as ordinary income upon reaching retirement age (59 ½ years old). Note that if you take withdrawal before retirement age you will typically be subject to an added 10% penalty.| *Note that[ Roth 401(k) contribution limits are much higher than a Roth IRA](https://www.sharebuilder401k.com/blog/roth-401k-meet-roth-iras-more-versatile-big-brother/ "Roth 401(k) and how it has more advantages than a Roth IRA") and there are no income limits to use it.* ## Roth Catch-up Contributions in 2026 and Beyond Starting in 2026, workers will be split into two categories depending on their earnings. + Those with adjusted gross income more than $150,000 in the prior year will need to make all catch-up contributions as [Roth](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "What is a Roth 401(k)?") contributions. This means you won’t be able to get a tax deduction for catch-up contributions. + Those with income less than $150,000 in the prior year can do catch-up as either traditional pre-tax or as Roth contributions. Note: This is only for catch-up contributions. Regular employee (and employer) contributions can be made as either pre-tax or post-tax. ## What are the 401(k) contribution deadlines? Other than for the self-employed starting their first Solo 401(k), all 401(k) participant contribution deadlines are typically the end of the calendar or December 31. Your employer can make contributions up until their business tax deadline. This is typically done with a [401(k) profit share](https://www.sharebuilder401k.com/blog/profit-sharing-tax-benefits-for-businesses-and-owners/ "Profit Sharing Tax Benefits for Businesses and Owners"). If you are self-employed and have a Solo 401(k), your [contribution deadline](https://www.sharebuilder401k.com/blog/solo-401k-contribution-deadlines/ "Solo 401(k) Contribution Deadlines") depends on your business entity type (LLC, sole proprietorship, S-corp, etc). Please note that all catch-up contributions are considered employee-side contributions. | **Business Entity Type** | **Employee Contributions Deadline** | **Employer Contributions Deadline** | | ------------ | :------------: | :------------: | | Sole Proprietors and Single- Member LLCs | 4/15/2026 to fund (Including Roth 401(k) and catch-up contributions) | 4/15/2026 to purchase and fund (all employer contributions must be made on a tax-deferred basis) | | C-Corps and Multi-Member LLCs taxed as C-Corps | 12/31/2025 | 4/15/2026 | | S-Corps, Partnerships, and Multi-Member LLCs taxed as S-Corps or Partnerships | 12/31/2025 | 3/17/2026 | *Please note that your Solo 401(k) provider will often have purchase and contribution deadlines earlier than the government deadline to ensure your plan is set up to receive qualifying contributions. It can take days to weeks for providers to set up your plan, so plan on purchasing well in advance.* If you are a sole proprietorship or single-member LLC, your employee contribution deadline will move to the calendar year-end in your second year of your Solo 401(k), but your employer contributions may be made up until your tax deadline if your provider allows. If you have an IRA, your contribution deadline is typically April 15th after the calendar year-end. ## Should I do catch-up contributions? Most experts suggest you'll need to save 10-15% of your income¹ over a 40-year career to live comfortably after you leave the work world behind. It’s ultimately a personal decision. Since retirement accounts are tax-advantaged, one benefit of a catch-up contribution is that your money and any growth it attains in your account will only be taxed once. That might be extra appealing as you get closer to retirement age. *¹Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.*

Do I Adjust My 401(k) When Markets Are Down

Market down swings and up swings can happen quickly and without warning. Yes, it’s pretty much impossible to time the markets, and when there is a big market down movement, it can be stressful. What should you do? First know this: you haven’t lost any money even though your 401(k) value has dropped. You only recognize a gain or loss when you take a distribution. Most folks won’t tap their 401(k) balances for 10, 20, 30 or even 40 years. Second, since 1926, there have been 15 recessions and 15 market recoveries.* We like that batting average for recoveries. And third, in every 20-year period researched back to 1926, the US stock market has delivered positive returns.** While history offers no guarantees, here are some additional perspectives that can help you more confidently determine the right path for you through good times and bad. __Jumping In and Out of the Market Is Typically a Bad Idea__ Given that markets can swing quickly, it can lead to some bad outcomes if you jump in and out of the market (if experts could time the market, they’d be retiring very young – we’re not seeing that). Some investors get so nervous during a big stock market drop that they move their 401(k) money out of stock funds into a money market or similar cash equivalent, essentially selling stock at a low. Then when markets rise, they feel more confident and move the money back to stock funds thereby buying at a higher point than they sold and missing the opportunity for a better return. Looking at the 20-year S&P 500 returns (index of the top 500 businesses in America) from 1999-2018, the S&P delivered an annual return of 5.62%. Not bad especially when you consider this includes the horribly negative returns of the Great Recession of 2008-2009 (and that since 1926 the S&P has averaged over 10% returns per year). If you had moved your money out of the S&P 500 during this 20-year period and missed the 30 best days, you would have experienced -0.33% return per year (yes that is negative each year). This is a very big deal. To make this point crystal clear, consider this hypothetical example. Let’s say two 401(k) investors, Anne and Alex, each had balances of $25,000 in their own accounts at the end of 1998. Each contributed $3,600 per year for 20 years, and each initially was investing in a S&P 500 like fund. Anne stays with her S&P 500 investment and earns 5.62% each year over the next 20 years. Alex gets nervous during market down swings and moves his money in and out of the S&P 500 and ended up with average return of -0.33%. The difference in their nest egg values is remarkable. ##### Stay the Course vs. Not | **20-Year Example** | **Alex** | **Anne** | **Difference** | | ------------ | :----------: | :----------: | :----------: | | Starting Balance| $25,000 | $25,000 | $0 | | Contributions| $72,000 | $72,000 | $0 | | Investment Earnings| -$3,928 | $108,338 | $112,265 | | Ending Balance| $93,072 | $205,338 | $112,265 | Anne has more than double the nest egg value of Alex with $205,338 vs. Alex’s account value of $93,072. That’s the big deal. __Down Markets Can Actually Be a Powerful Buying Opportunity__ So you can see jumping out of the market in bad times and back in during good times can be costly to your nest egg. The beauty of automatic investing with each payroll in an 401(k) account is that you buy more of a fund in down markets due to the lower prices and less of a fund in good times. This is called dollar cost averaging, and it can help you achieve greater returns over time (of course, there are no guarantees). This example shows how it can work. ##### The Upside of Dollar Cost Averaging | **Period** | **Amount Contributed** | **Fund Share Price** | **Shares Purchased** | | ------------ | :----------: | :----------: | :----------: | | 1 (market high) | $500 | $100 | 5 | | 2 (market low) | $500 | $50 | 10 | | 3 (recovering market) | $500 | $75 | 6.67 | | Totals | $1,500 | $75 average | 21.67 | | Value | $1,625.25 | 21.67 shares x $75 | | By sticking with your investing plan in this scenario, your account value is currently 8.35% better off even though the market has not come close to exceeding the previous high of $100 per share. Pretty cool. __Choose Your Strategy for How Much You Put in Stocks and Bonds__ Here’s the thing. We aren’t all comfortable with big swings in the markets and typically the closer we are to using the money, the less we want to experience these swings. Historically, large cap stock funds have returned 10% per year since 1926, government intermediate bonds over 5% and cash over 3% (note that most savings accounts and money markets are offering interest rates of less than 1.5% currently). Stocks have also been much more volatile versus bonds and cash. Generally, the more you invest in bonds and cash, the less volatile your portfolio is. The more in stock, the more volatile it is. The old rule of thumb is to put about your age as percentage in bond funds and the rest in stock funds for your 401(k). So, if you are 30, you’d put 30% in bonds and 70% in stocks. This can be fine when you are less than 50 years of age, but you may want to have less in bonds than your age after reaching this age. If you’re 60 years of age or more and thinking about retirement, having some broadly diversified stock funds in your portfolio is a good thing. Most people expect to live 20 to 30 more years past 60 giving you time to ride out a downturn. Keep in mind, it’s important for you to have revenue generating assets like bonds and cash to cover at least 5 years when you retire to help your stock holdings persevere a down market. When the market recovers you can adjust your overall allocations between stocks, bonds and cash holdings and likely be better off. Most importantly, pick an allocation that helps you rest better at night. We hope you find this helpful perspective. Be well and prosper. Sources: \* US Business Cycle Expansions and Contractions available at http://www.nber.org/cycles.html \*\* 2019 SBBI Yearbook, U.S. Capital Markets Performance by Asset Class 1926-2018. Duff & Phelps, LLC. Data use Morningstar, Inc.

IUL vs 401k

# IUL vs 401(k) ## How Is an Indexed Universal Life Insurance (IUL) Different from a 401(k) Retirement Plan? Recently, within financial social media circles, there has been a lot of hype around Indexed Universal Life Insurance (IUL) being a more viable option for retirement saving vs a 401(k). Proponents (typically insurance sales associates who earn commissions for selling the product) have touted IUL’s policies as the panacea of retirement planning with the ability to be “your own bank.” You may be asking yourself: Are these claims true? Can this product really help me save for retirement more efficiently than other savings vehicles such as 401(k)s and IRAs? What are the tax implications? What is the best product for me? In this blog, we will address these questions and many others so you can make an informed decision about the differences and help you determine if and when each product is or is not appropriate for you. ## What is an Indexed Universal Life Insurance Policy? What is a 401(k)? __Indexed Universal Life (IUL) is a type of permanent life insurance policy that also offers a cash value component.__ The cash value can be used for multiple purposes including retirement savings, supplemental income, and other financial needs. On the other hand, a __401(k) is an employer-sponsored plan that helps employees and business owners alike contribute for retirement.__ It offers tax advantages and often employer matching contributions. As you will learn here, these are not substitute products and are suited for unique needs and objectives. Most everyone needs to build savings for retirement, and the need for life insurance will depend on your goals and financial situation. ## What are the primary objectives of an Indexed Universal Life Insurance Policy? Of a 401(k)? __An IUL policy’s primary objective is to provide a death benefit to beneficiaries upon the death of the insured.__ Secondarily, the policy contains a cash value account that can be accessed during the insured’s lifetime. __A 401(k) plan’s primary objective is to help employees, including business owners, save for retirement.__ Contributions to a 401(k) can be made with either pre or post tax dollars (via Roth if your plan allows). Monies then can grow tax–deferred until withdrawal during retirement, or in the case of Roth contributions, tax–free, earnings and all. Further, most employers provide a matching contribution that the employee would not otherwise receive unless they participate in their 401(k) plan. ## How do the fees compare/differ between IULs and 401(k) plans? #### IUL fees are extensive and can be broken down into the following categories: - Insurance Cost – Cost of providing death benefit - Admin Fees – Fees covering processing paperwork, maintaining records and customer service - Surrender Charges – If you cancel or surrender the policy within a certain time (typically after the first several years after issuance) - Rider Fees – Optional riders such as accelerated death benefit rider or long-term care incur additional fees - Indexing Fees – May be fees associated with tracking the performance of the chosen index or indexes - Loan Interest – If you take a loan against the cash value of your IUL policy, you may be charged interest on the loan amount - Mortality and Expense Risk Charge – This fee covers the insurance company’s expenses risk of providing death benefit to the policyholder ### 401(k) fees include the following: - Setup or Conversion Cost – One time charge to either set up your first plan or convert from another provider - Administration/Record Keeping Charges – Ongoing expense to service your employees, plan sponsors, and help ensure your plan is run in a compliant manner - Investment Expenses – These include fund expense ratios, revenue sharing (12b-1s), custodial, and/or investment management services - 401(k) Loan Charge – if you take a 401(k) loan, there is typically a one-time charge to initiate it. From there, as you pay back the loan, the money goes directly back to you (this includes any interest). The interest is designed to help you catch back up on your retirement savings and is not going to a provider. ## What are the tax differences between IULs and 401(k) plans? IUL contributions are made via premium payments with after-tax dollars, meaning they are not tax-deductible. Any cash value growth within an IUL grows tax-deferred, meaning you do not pay taxes on the growth if it remains in the policy. Withdrawals from the cash value of an IUL are typically tax-free up to the amount of premiums paid. Any withdrawals above this amount may be subject to taxes depending on policy structure. Traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income in the year of the contribution. Roth 401(k) contributions (a plan feature available in most 401(k) plans) are made with after-tax contributions and then can be accessed (earnings and all) tax-free in retirement. Withdrawals from a traditional 401(k) are taxed as ordinary income in retirement; however, there are no dividend or capital gains tax as you accumulate wealth. Withdrawals from a Roth 401(k) are tax-free if the account has been open for at least 5 years and the individual is over 59½. Assets withdrawn from a traditional or Roth 401(k) before age 59½ may incur a 10% penalty. ## Can an Indexed Universal Life Insurance Policy really serve as my own bank? Not exactly – The claims that IULs can be your own bank are an oversimplification and can be misleading for many reasons. __Here are a few key points that differentiate IUL policies and your traditional bank__: - Liquidity and access to funds: Money within a bank can in most cases be accessed quickly and easily, while accessing the cash value in an IUL can take much longer depending on policy restrictions and waiting periods. - Fees and charges: IUL policies often come with high fees and charges, including premium loads, cost of insurance, admin fees and surrender charges if you terminate/cancel the policy. - Loss of Coverage with Default on Payments: If you default on payments past the grace period, you can lose coverage, and your beneficiaries cannot claim benefits upon your death. In some instances, the insurance provider may let you reinstate it by catching up on payments and paying interest charges. However, you may be subject to updating associated health questions that can impact your ongoing costs. With a 401(k), the money is always yours, including vested employer matching regardless of whether you quit contributing. - Risk and Guarantees: First and foremost, IUL policies, and the cash value, are not FDIC insured like standard bank accounts. IUL cash value performance is tied to the performance of the stock market. While there is typically a floor to prevent losses, the growth potential is capped (meaning you may not fully benefit from market upswings). ## Which product is best for me? Most experts will agree that these are not comparable products. If you want death benefits for your survivor and are concerned your retirement savings will not be enough, then you may want to consider an IUL or other life insurance product. However, contributing to your 401(k) (and receiving a company match) is a benefit that helps you build for yourself and your family in retirement, which is a different objective altogether. Sure, the IUL can provide access to a cash account, but again this is not the primary purpose of the product. Whether you want or need an IUL is a highly individual question and depends on your primary financial objective and goals. However, below we will attempt to cover advantages and limitations for an IUL and a 401(k), so you can further delineate these products and make a more informed decision regarding the best way to manage retirement and taking care of your loved ones after death. ## Indexed Universal Life (IUL) Policies ### Advantages: 1. Tax-Advantaged Growth: - Cash value grows tax-deferred, and loans against the policy can be tax-free if structured properly. 2. No Contribution Limits: - No government-imposed contribution limits, you contribute as much as you want per year. 3. Death Benefit: - Provides a death benefit to beneficiaries, which can be a valuable estate planning tool. 4. Market Downside Protection: - Some policies have built-in floors that can protect against market losses. 5. No RMDs: - There are no required minimum distributions, allowing you to control withdrawals according to your needs if you choose to use for this purpose ### Limitations: 1. Complexity and Fees: - IUL policies can be complex and come with high fees and charges, including cost of insurance, administrative fees, and surrender charges if you no longer want the policy. 2. Loss of Coverage if You Fail to Pay Premiums: - There is generally a grace period, but if for whatever reason you do not pay premiums you can lose coverage, and your beneficiaries cannot claim benefits. 3. Loan Costs: - Loans against the policy accrue interest and, if not repaid, reduce the death benefit that is paid to the beneficiary. 4. Market Participation Limits: - For most policies, investment growth is tied to a stock market index, but gains are typically capped, limiting upside potential. 5. Sales Practices: - These policies are often sold by insurance agents who may emphasize benefits without fully explaining costs and risks. ## 401(k) Plans ### Advantages: 1. Tax Advantages: - Pre-Tax Contributions: Contributions are made with pre-tax dollars, reducing your taxable income for the year. - Tax-Deferred Growth: Investments grow tax-deferred until withdrawn. - Tax-Free Growth via Roth Contributions: After-tax contributions can be accessed (earnings and all) tax-free in retirement. 2. High Contribution Limits: - For 2024, the contribution limit for a 401(k) is $23,000 for individuals under 50, and an additional $7,500 catch-up contribution for those 50 and older. - Plus, any employer matching or 401(k) profit share goes beyond these individual contribution limits up to $69,000 total. 3. Variety of Investment Options: - You typically have a range of investment options, including mutual funds, ETFs, stocks, and bonds, allowing for diversified growth potential. You can also customize your investment portfolio to support evolving retirement goals. 4. Loans and Hardship Withdrawals: - Some plans allow you to take loans or hardship withdrawals under specific conditions. You pay the money back to your own account, any interest and all, not to a provider. 5. Posthumously, Your Beneficiaries Receive Remaining 401(k) Savings: - When you start your 401(k) account, you are asked to name beneficiaries and contingent beneficiaries. If you fill this out and have 401(k) savings, your money will pass to your beneficiaries. If you rolled your 401(k) into an IRA and assigned beneficiaries, the same will occur and no need to worry about probate. It is always good to ensure you have beneficiaries assigned and update as needed. ### Limitations: 1. Required Minimum Distributions (RMDs): - If you leave your money in your 401(k) and retire, you must start taking RMDs at age 73 (as of 2023), which can affect tax planning and your overall retirement strategy. If you remain employed at the company past 73, you need not take RMDs from your associated 401(k) plan until you retire. 2. Market Risk: - Investments are subject to market fluctuations, which can impact the value of your retirement savings. There is no floor available for market losses. However, there are typically stable offerings be it a stable value portfolio or a money market if you want to limit risk to the markets in retirement. 3. Limited Access: - You cannot access your funds without penalties before age 59½, except under specific circumstances like hardship withdrawals or loans. Your plan may even restrict it further than 59½. Regardless, when you retire past the age of 59½ you have full access to your money. ## How do you make sense of it all? __401(k) Plans__ will generally be best for business owners or individuals looking for a tax-efficient means to build retirement savings. 401(k)s tend to be a straightforward, low-cost retirement savings vehicle with tax advantages and potential employer matching contributions for all participants. If you are a business owner, consider a 401(k) if you want to offer a retirement vehicle to you and your employees with high contribution limits, both pre- and post-tax (Roth) contributions, a variety of investment options, and the ability to take a loan/hardship withdrawal under specific conditions. Also, it is worth noting that the 401(k) vested money is always the employee’s, there is no issue or consequence if you quit contributing (other than potentially having less saved for retirement) and beneficiaries will receive any remaining funds posthumously. __IUL Policies__ will be best suited for individuals seeking a life insurance policy that pays a death benefit to the beneficiary of the policy, with the added potential of growth and flexible access to cash value. Before purchasing an IUL, be certain you understand all the complexities and costs involved so there are no hidden surprises that catch you off guard and that premiums are affordable for you. ## Key Takeaways: - While some social media pundits suggest an IUL is a substitute product for a 401(k), it is not. These are different products with different objectives, features, and costs. - Indexed Universal Life (IUL) is a type of permanent life insurance policy that also offers a cash value component. The cash value can be used for multiple purposes including retirement savings, supplemental income, and other financial needs. - A 401(k) is an employer-sponsored plan that helps employees and business owners alike contribute for retirement. It offers tax advantages and typically employer matching contributions - The primary purpose of an IUL policy is to provide a death benefit to beneficiaries upon the death of the insured. Secondarily, the policy contains a cash value account that can be accessed during the insured’s lifetime. - 401(k)s primarily help employers and employees save for retirement. Contributions to a 401(k) can be made with either pre- or post-tax dollars (via Roth if your plan allows). Monies then can grow tax–deferred until withdrawal during retirement, or in the case of Roth contributions, tax–free, earnings and all. Any remaining money post death goes to beneficiaries. - Premium payments for an IUL policy are made with after tax dollars, meaning they are not tax-deductible. If you default on premium payments past the grace period, you can lose coverage and your beneficiaries would receive no benefits. Traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income in the year of the contribution. Roth 401(k) contributions are made with after-tax contributions and then can be accessed (earnings and all) tax-free in retirement. Dividends and capital gains are not taxed in a 401(k) plan. - Which product is best? This is not an either-or decision as the products are not substitutes. 401(k) plans are designed to help employees and business owners build retirement savings with tax advantages plus receive potential employer matching contributions (free added money). IUL policies may be a consideration for individuals seeking a life insurance policy that pays a death benefit to the beneficiary of the policy, with the added potential of growth and flexible access to cash value. IUL or term life insurance may be a need if you want to pass money to heirs and do not believe your retirement savings will meet the goals you have defined. * This material is intended only as general information for your convenience and should not in any way be construed as investment or tax advice by ShareBuilder 401k. The owner/participant should consult with their tax advisor regarding any specific tax strategies. *

401(k) Max Contribution Limits and More

Inflation is still sticking around this year. The good news is that in 2025 you will be able to put more money away in your 401(k). The IRS released the contribution and tax-deferral limits for 401(k) plans, IRAs, and other retirement accounts for 2025. Changes are based on the U.S. cost of living increases, and there are notable changes for those saving in 401(k) accounts. 401(k) employee contribution limits increase in 2025 to $23,500 from $23,000 in 2024. Those over 50 years of age can still make the same catch-up contributions of $7,500 per year (that's up to $31,000 per year in total excluding any employer match) to their 401(k) accounts. Most 401(k)s allow Roth 401(k) contributions. Employees may choose to put some, none, or all contributions into the Roth 401(k) or tax-deferred option. Separately, IRA limits remained at $7,000, and IRA catch-up limits remained at $1,000. __The Total Amount You Can Defer Into a 401(k) is Increased to $70,000__ Another 401(k) area of import that changed is the amount you can contribute and receive in total to your 401(k) account. If you receive company matching contributions or profit sharing, the all-in limit has been increased from $69,000 to $70,000 for 2025 with those over 50 years able to put in $77,500 with the catch-up. Those aged 60-63 will be able to put in $81,250 with the new catch-up provision. Here is a summary of the 2025 401(k) limits as compared to 2024: | 401(k) Limits for 2025 | | | | ----------------------------------- | -- | -- | | | 2025 | 2024 | | Employee contribution limit | $23,500 | $23,000 | | Annual limit per individual | $70,000 | $69,000 | | Age 50+ catch-up amount | $7,500 | $7,500 | | Age 60-63 catch-up amount | $11,250 | N/A | | Annual compensation limit | $350,000 | $345,000 | | Highly compensated employees | $160,000 | $155,000 | __401(k) Saving Advantages Over Traditional IRAs Are Significant__ The tax advantages for 401(k) savers versus those opting to use IRAs, or those who don't have access to a 401(k) plan, is now even larger. | 401(k) Advantages Over Traditional IRAs in 2025 | | | | ----------------------------------- | :-: | :-: | | | __401(k)__ | __IRA__ | | Annual limit per individual | $70,000
(employee + employer contributions) | $7,000 | | Age 50+ catch-up amount | $7,500 | $1,000 | | Age 60-63 catch-up amount | $11,250 | N/A | | Roth income limit | None | $165K* | | Penalty-free access, if needed | Yes, via a loan** | No | ^{*Beginning at $150K, the amount you are allowed to contribute begins to decrease, hitting $0 at $165K for singles (range is $236K to $246K for married couples filing jointly)}
^{**Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can significantly reduce your retirement savings.} Along with the 2025 IRA contribution limit increase, you can earn more in 2025 and are able to deduct your IRA contributions. The phase out income limits for contributing to a Roth IRA increased from 2024 depending on your filing status. Refer to [IRS announcement and notice for 2025](https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000) for more details.

What is a 401(k) Contribution Limit?

__Key Takeaways__ - 401(k)-contribution limits are set by the IRS to state how much money an individual and employer are allowed to put into their 401(k) savings account. - The total contribution limit in 2026 is $72,000. This includes both employee contributions and employer contributions combined. - The 401(k)-employee contribution limit in 2026 is $24,500. - A catch-up contribution is a type of retirement contribution that allows those 50 years old or older to make additional contributions to their 401(k) account. This is to help individuals who are closer to retirement age save more for their future. - If you're over the age of 50, you can make an annual "catch-up" contribution of $8,000. This increases the total contribution limit to $80,000. - Solo 401k plans users have more flexibility in determining the total amount to contribute each year as they are both the employer and employee. __What is a 401(k) Contribution Limit?__ A 401(k)-contribution limit is set by the IRS to state on how much an individual and employer are allowed to put into an employee’s 401(k) savings account. These limits are set to account for inflation, cost of living, and other factors. For 2024 the contribution limit is $23,000 for an employee, and an employer contribution can bring the total contribution up to $69,000. __What is a Catch-up Contribution Limit?__ A catch-up contribution is a type of retirement contribution that allows those 50 or older to make additional contributions to their 401(k) plan. If you're 50 or older, you're allowed to make an annual "catch-up" contribution of $7,500 on top of the annual allowed limit. This is to help individuals who are closer to retirement age save more for their future. __2023 vs 2024 Contribution Limits__ | 401(k) Limits for 2024 | | | | ----------------------------------- | -- | -- | | | 2024 | 2023 | | Employee contribution limit | $23,000 | $22,500 | | Annual limit per individual | $69,000 | $6,000 | | Age 50+ catch-up amount | $7,500 | $7,500 | | Annual compensation limit | $345,000 | $330,000 | | Highly compensated employees | $155,000 | $150,000 | 401(k) employee contribution limits increase in 2024 to $23,000 from $22,500 in 2023. Those over 50 years of age can make additional catch-up contributions of $7,500 per year (that's up to $30,500 per year in total before any employer match) to their 401(k) accounts. Most 401(k) plans allow Roth 401(k) contributions. Employees may choose to put some, none, or all contributions into the Roth 401(k) or Traditional tax-deferred option. Do know that all employer matches or contributions must be provided on a tax-deferred basis. Separately, IRA limits remain the same as last year. __Solo 401(k) Contribution Limits 2024__ A solo 401(k), also known as an Individual 401(k), is a retirement plan for self-employed business owners and their spouses. This type of retirement plan allows you to contribute to the plan as both the employer and employee, providing you with the ability to maximize contributions and business deductions while lowering your personal taxes. Like other 401(k) plan types, those with a Solo 401(k), the annual contribution limit per individual is $69,000. However, as the owner is both the employer and employee, it can be simpler to manage how much you choose to contribute in each role. __Solo 401(k) Contribution Limits vs IRA Contribution Limits__ | | __401(k)__ | __IRA__ | | ----------------------------------- | :-: | :-: | | Annual limit per individual | $69,000
(employee + employer contributions) | $7,000 | | Age 50+ catch-up amount | $7,500 | $1,000 | | Roth income limit | None | $161K* | | [Penalty-free access](https://www.sharebuilder401k.com/blog/401k-loans-the-good-the-bad-and-the-ugly/ "401(k) loans: The good, the bad and the ugly"), if needed | Yes, via a loan | No | ^{*Beginning at $146K, the amount you are allowed to contribute begins to decrease, hitting $0 at $161K for singles (range is $230K to $240K for married couples filing jointly)} Here are a few more resources that you may find helpful: •[2024 401(k) Max Contribution Limits and More](https://www.sharebuilder401k.com/blog/2024-401-k-max-contribution-limits-and-more/) • [401(k) Savings Advantages](https://www.sharebuilder401k.com/overview/401k-saving-advantages/ "401(k) savings advantages") • [401(k) Advantages over SEP and SIMPLE IRAs](https://www.sharebuilder401k.com/help/401k-vs-sep-ira/ "401(k) Advantages over SEP and SIMPLE IRAs") If you need help or have questions, just give us a ring at 1-800-431-7934.

Upgrade from a SIMPLE IRA to a 401(k) | ShareBuilder 401k

# Can I rollover a SIMPLE IRA to a 401(k)? Companies can now transition from a Simple IRA to a specific type of 401(k) plan called the [Safe Harbor 401(k) ](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "What is a Safe Harbor 401(k)?")at any point during the year. This allows small business owners to take advantage of the higher contribution limits, flexibility, and loan features of a 401(k) plan. ## SIMPLE IRA vs 401(k) Both a SIMPLE IRA and a 401(k) are employer-sponsored retirement plans, but many businesses switch to a 401(k) for added perks like [Roth options](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/ "What is a Roth 401(k)?"), [loan access](https://www.sharebuilder401k.com/blog/401k-loans-the-good-the-bad-and-the-ugly/ "How 401(k) Loans Work"), and much [higher contribution limits](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/). | **Core Feature Differences** | **SIMPLE IRA** | **Safe Harbor 401(k)** | | ---------------------- | --------------------- | ---------------------- | | Employee Contribution Limit - 2025 | $16,500 | $23,500 | | Ages 50-59 or 64+ Catch-Up Contribution Limit | $3,500 (for a total of $20,000) | $7,500 (for a total of $31,000) | | Ages 60-63 Catch-Up Contribution Limit | $5,250 (for a total of $21,750) | $11,250 (for a total of $34,750) | | Roth Option | Not applicable | Yes – no income limit to use | | 401(k) Loans | Not applicable | Available to withdraw with no taxes or penalties, 50% of your savings (up to $50,000). Accrues interest and must be paid back within 5 years.* | | Employer Matching / Contribution | 3% of salary to all those contributing and at least 2% to those who are not | Various options – Safe Harbor designs are typically 3% or 4% of salary depending on needs. | ## What are the steps to replace your SIMPLE IRA with a Safe Harbor 401(k)? You will need to plan a few things to ensure your transition to a Safe Harbor 401(k) goes smoothly. 1. You will need to identify your preferred 401(k) provider and start a Safe Harbor 401(k). Like a SIMPLE IRA, an immediate vesting match is required. As you prepare your new plan, you’ll want to square away the following with your 401(k) provider: * Verify an appropriate termination date for the SIMPLE IRA and ensure your SIMPLE IRA and 401(k) provider are both aligned on this timing. * If you have payroll integration, you will want to know the requirements and ensure your 401(k) provider supports you as you prepare to switch. If you do not have payroll integration, just be familiar with the input or upload process, so it goes smoothly. You will need to ensure your employee information is loaded with your 401(k) provider during the install process. * We also suggest having your 401(k) provider conduct an employee education kick-off meeting at launch. 2. When you replace a SIMPLE IRA with a Safe Harbor 401(k) during the year, you will need to work with your 401(k) provider to determine the contribution limit that employees may put away during the current year. It is basically a weighted average of SIMPLE IRA and 401(k) contribution limits for the year the plan is converted. As the next calendar year kicks off, only the 401(k) contribution limits will apply. 3. As you are set to roll out the Safe Harbor 401(k) plan, you will need to provide two notices to employees; one that states the SIMPLE IRA termination and one that announces the Safe Harbor 401(k). Your provider likely has notices you can use or tailor for your needs. Once your Safe Harbor 401(k) is live and you get near year end, most providers have a year-end census process. You’ll want to make sure to include all SIMPLE IRA contributions made during the year. This will keep your plan in compliance; or allow you to make adjustments to ensure it is. While retirement plan conversion takes a little planning, the benefits to owners and employees can make a big difference in saving more for retirement (and managing personal taxes, too). Ready to explore your options? [Connect with our experts today.](https://retire.sharebuilder401k.com/ShareBuilder401kBlog "Get a personalized plan design started") ## What is a Safe Harbor 401(k)? [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/learn-why-safe-harbor-401-k-plans-are-the-best-fit-for-most-small-businesses/ "Learn why safe harbor 401k plans are the best fit for most small businesses") plans enable small business owners to take advantage of higher contribution limits into a tax-deferred retirement account while automatically satisfying government required non-discrimination compliance tests. While some businesses are concerned with the cost of providing a match, it is typically [100% tax deductible](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax/ "401k matching is often 100% tax deductible -- how it works"). [Talk to our retirement experts today](https://www.sharebuilder401k.com/about/contact-us/ "Contact our retirement experts") to uncover the key differences and find the best plan for your business. ## Tax Credit Covers 100% of New Plan Costs for the First Three Years The cost of switching from a SIMPLE IRA to a Safe Harbor 401(k) could be [completely covered by tax credits](https://www.sharebuilder401k.com/blog/secure-2.0-overview/ "Secure 2.0 Overview")^**. This credit can be applied to 100% of your qualified business 401(k) costs such as plan setup and administration. There is also a tax credit available to help cover employee matching for the first 5 years of a new 401(k) plan. To qualify, your business must have less than 50 employees, though those with 51-100 employees can also receive a reduced tax credit. The startup credit for both business sizes is capped at $5,000 per year for three years, for up to a total of $15,000 in tax credits. Make sure to confirm with your tax professional how much of a credit your new plan could receive. ## Key Takeaways: - Small businesses can now switch from a SIMPLE IRA to a Safe Harbor 401(k) at any time during the year, unlocking higher contribution limits, Roth options, loan flexibility, and greater control over retirement savings and tax management. - SIMPLE IRAs and 401(k)s are both employer-sponsored plans, but a Safe Harbor 401(k) offers higher contribution limits, Roth options, and loan access that SIMPLE IRAs don’t. This gives owners and employees more ways to maximize savings and flexibility for retirement. - To replace a SIMPLE IRA, select your 401(k) provider, align your termination date, update payroll, send employee notices, and coordinate contributions. Your provider will guide setup, compliance, and education to ensure a smooth and compliant transition. ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies. ^*Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can significantly reduce your retirement savings. ^**View [important disclaimers](http://retirement.sharebuilder401k.com/offer-details-and-disclosures.html "Important Disclaimers") on how 401(k) tax credits work.

Important Deadlines for the Self-Employed Considering a Solo 401k

The self-employed can have a 401(k) plan. It’s commonly called a Solo 401k or Individual 401k plan, and it can be a powerful way to build your retirement nest egg and lower your personal taxes too. Know that if you have any full-time employees, you will not qualify for this [plan type](https://www.sharebuilder401k.com/products-pricing/plan-designs/ "401k plan design options by need and employee size"). How is a Solo 401k powerful you might ask? Well, the cool thing is that since you are both the employer and employee, you can contribute up to $61,000 per year as of 2022 ($58,000 in 2021) to the Solo 401k. Contributing this high amount not only lowers your current year's taxes, but it also might drop you a tax bracket. This can give your retirement savings a sizeable boost too. Of course, you must make some serious mullah to reach the limit, but regardless, the 401k contribution limits are so much greater than an individual IRA that many self-employed can benefit. For an example showing how a self-employed business owner contributing $50,000 to a Solo 401k can save an estimated $10,000 more in taxes, visit [our Solo 401k product page](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401k Plan Information and FAQs"). __Important Deadlines by Role (You Are Both the Employee and Employer)__ There are important deadlines to know if you start a Solo 401k plan. 1. As employee, you may contribute at any time during the calendar year up to the [individual employee limit](https://www.sharebuilder401k.com/blog/2022-401k-contribution-limits-ira-and-roth-limits-and-more/ "2022 401k and IRA contribution limits") through the end of the calendar year. So, December 31st, or the last business day of the year for some providers, is the last day to make an employee contribution. As an employee, if your plan allows, you can make either tax deferred contributions, Roth 401k contributions, or both. If you are over 50 years of age, you can make a catch-up contribution as well. Lastly, you may choose to contribute in lump sum or establish a recurring ACH on a monthly or bi-weekly basis if you prefer the [benefits of dollar-cost averaging](https://www.sharebuilder401k.com/blog/how-automatic-investing-dollar-cost-averaging-helps-you-in-good-time-and-bad/ "How dollar cost averaging helps you good and bad markets"). 2. As an employer, you may make employer contributions until your business tax deadline which is March 15th for a few entity types but April 15th for most with a calendar fiscal year. You have more time with employer contributions to consider more closely your tax and saving needs for the year. Savvy Solo 401k users will determine and make a lump sum employer contribution either quarterly or often after the fiscal year end to best manage these needs. As the employer, you can typically put in 20%-25% of earnings into your Solo 401k up to the limit. 3. If you are thinking about setting up your first Solo 401k, and you want it to qualify for the current year, you need to set it up in the current year. December is often a busy time for Solo 401k providers. Many self-employed companies wait until December (the last month of the year) to start their plan knowing it can help them manage the current year's taxes up until their tax deadline. If your business fiscal year is on a calendar year basis, don’t wait until January, or it will be too late to use a Solo 401k to help manage your past year’s tax and retirement saving needs. To learn more about Solo 401ks including how the limits work and FAQs, just [visit our Solo 401k product page](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401k Plan Information and FAQs"). Happy saving.

401(k) Enrollment: How it Works | ShareBuilder 401k

401(k) enrollment is the process of joining your employer’s retirement savings plan. Employees can sign up once eligible, choose their contribution rate, and select investments. Understanding 401(k) enrollment rules ensures you start saving early, take advantage of employer matching, and build long-term retirement wealth. ## Can You Enroll in a 401(k) at Any Time? Well, it depends on the 401(k) parameters set by your employer. Entry into the 401(k) could be immediate, or you may need to meet requirements related to your age or length of service with your company before you are able to enroll. It’s not uncommon for the minimum age to be set at 21, and sometimes employers set a requirement of 1 year of employment before an employee may enroll. Additionally, your employer can set entry restrictions – specific time(s) of the year newer employees may join. Check with your employer and see if your 401(k) has an open enrollment period, or if there is a restriction such as a monthly or semi-annual enrollment schedule. Most plan details can be found in the 401(k) plan documents that your employer is required to make available to you. Your plan sponsor may also offer 401(k) employee education meetings via your 401(k) provider, so you have the opportunity to ask questions and feel confident in enrolling and investing for your retirement. ## What is 401(k) Enrollment Eligibility? Employers have options in determining when employees are eligible to enroll in their 401(k) program. 401(k) eligibility outlines the criteria an employee must meet to participate in the plan. Some employers may find it beneficial to allow their employees to have access to the 401(k) plan immediately, while others may require employees to first reach a minimum age or certain length of service. Choosing entry requirements into the 401(k) plan is entirely dependent on business goals and business characteristics. An employer may establish a minimum age requirement for 401(k) participation, which cannot be higher than the age of 21. This age requirement may help the business reduce costs, as employees under 21 typically tend to have higher turnover rates as they get going in their careers. An employer may also establish service requirements, meaning employees must work for the company for a minimum amount of time before becoming eligible to join the 401(k) plan. Service requirements can range anywhere from a couple of months to a couple of years. Companies that choose longer service requirements may have seasonal aspects to their business and/or experience high employee turnover and can use the service requirement to promote employee retention and simplify managing their 401(k) benefits program. In many cases, companies forgo entry requirements entirely given their business needs or to qualify for [Safe Harbor](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/ "What is a Safe Harbor 401(k)?") safeguards. In this case, employees are immediately enrolled into the 401(k) program upon hiring. This is also a good option for businesses who want to attract top employee talent to join their company and encourage their employees to save for retirement. ## What Are 401(k) Enrollment Periods? Employers can enable immediate enrollment option upon hire or may define specific enrollment periods. If a specific period, employers can set an entry date to be monthly, quarterly, semi-annually, or even annually. Once an employee reaches the age and/or service requirement, they’ll be able to enter into the 401(k) upon the next entry period, which could be within a few days or months depending on the company’s 401(k) rules. ## Deciding Your 401(k) Contributions Once you are enrolled in your 401(k), you’ll need to decide how much to contribute. Depending on the 401(k) rules set by your employer, you may already be contributing through [automatic contributions](https://www.sharebuilder401k.com/blog/what-is-401k-automatic-enrollment/ "What is 401(k) Automatic Enrollment?"), which is set at a certain percentage to start you out. You can adjust the rate of the automatic contribution at any time, or opt out completely, but it is in your best interest to contribute to your retirement plan and build your nest egg, especially if your employer is offering a [401(k) match](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match/ "To Match or Not to Match"). The employer match is an incentive companies use to retain their employees by matching up to a certain percent of their employees’ 401(k) contributions. For example, a dollar for dollar match up to 3% means that if you contribute up to 3% of your salary to your 401(k), the company will 100% match your contribution. While you can contribute more, the company will still only match the first 3%. Some companies do a 50 cent on the dollar, or a 50% match, so ask your employer what rules are set for your 401(k) so you can decide on a deferral amount that maximizes your retirement contributions. Most experts suggest putting away [10-15% of your salary](https://www.sharebuilder401k.com/blog/how-much-money-do-you-need-to-retire/ "How Much Money Do You Need to Retire") into your 401(k), but if you can’t start at this rate, you can gradually increase your contributions over time. Think of it like giving your 401(k) a raise each year. You’ll be required to stay within the [max contribution limits](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/ "401(k) Max Contribution Limits") the IRS imposes each year. For 2025, you can contribute up to $23,500 as an employee, and those age 50 or older can contribute a catch-up amount of $7,500. If you’re aged 60-63, the catch-up amount is even higher at $11,250. ## Choosing Your Investments After you have determined your contribution percentage, you’ll be required to [choose which investments](https://www.sharebuilder401k.com/blog/how-to-select-funds-in-your-401k-plan "How to Select Funds in Your 401(k) Plan") you want your contributions allocated. Most company 401(k) plans offer an investment roster of select set of retirement appropriate funds, or you can choose a [model portfolio](https://www.sharebuilder401k.com/services-investments/model-portfolios/ "Model Portfolios"), which is comprised of a pre-determined set of investment funds based on risk tolerance and time horizon. Some offer target date funds which is similar that it is portfolio you select that adjusts based on the year you expect to retire; however, it doesn’t fully consider how your risk tolerance may vary from others unlike model portfolios. If you’re unsure what your risk tolerance is, you can check out this [investment style quiz](https://www.sharebuilder401k.com/services-investments/investment-style/ "Investment Style Quiz") that can help you identify if you would prefer a more conservative or aggressive approach to investing. ## What are Vesting Schedules? Companies may impose vesting schedules for the employer-matched funds deposited into your 401(k). Vesting schedules determine when you officially "own" the employer contributions made to your 401(k) account. While the money you contribute is always 100% yours, the employer contributions may be subject to a vesting schedule. Here are the three common types of vesting schedules: - __Immediate Vesting__ - You own 100% of the employer contributions right away. - __Cliff Vesting__ - You become __100% vested all at once__ after a specific period (often 1 to 3 years). - __Example:__ You must work __2 full years__ before any of the employer contributions become yours. - __Graded Vesting__ - You become vested __gradually over time__, typically over a 3–6 year period. - __Example:__ - 1 year: 20% vested - 2 years: 40% - 3 years: 60% - 4 years: 80% - 5 years: 100% If you leave your job before you're fully vested, you may forfeit some or all of the employer matching contributions. Understanding your vesting schedule helps you plan your career moves and retirement savings strategy. ## Your 401(k) Is Ready, Here’s What to Do Next The hard part is over—you have been hired into a job that offers a 401(k) program, and now it's time to take advantage of this retirement benefit. Your Office Manager, HR or benefits coordinator can guide you through the setup process, and your plan sponsor will likely provide documents and forms that explain the plan details, helping you make informed decisions and maximize your contributions. Once your account is up and running, your savings can grow steadily in the background. As your career progresses, it’s a good idea to periodically review your 401(k) and adjust your investment strategy to reflect your evolving risk tolerance and retirement goals. Stay consistent, stay informed, and before you know it, you’ll be sipping something cold by the beach, enjoying the retirement you planned for. ## How to Enroll in a 401(k): Step by Step 1. Check Eligibility Requirements - You’ll need to confirm with your HR department if and when you’re eligible to join your company’s 401(k) plan. 2. Review Plan Options - Read through the plan’s summary plan description (SPD) to understand available investment choices, employer matching, vesting schedule, and fees. 3. Complete Enrollment Forms - This may be done online or on paper, depending on your plan provider. You’ll need to: - Choose your contribution amount (a percentage of your paycheck). - Decide between pre-tax (traditional 401(k)) or Roth (after-tax) contributions, if both are available. - Select your investment options. 4. Set Up Contributions - Once enrolled, your chosen contribution amount will be automatically deducted from your paycheck each pay period. 5. Monitor and Adjust - After enrolling, review your account periodically. You can change your contribution amount or investment selections as your financial situation evolves.

Celebrating 20 Years | ShareBuilder 401k

We launched ShareBuilder 401k way back on October 17, 2005 with a mission to help more Americans save. For twenty years, we have stayed relentlessly focused on making 401(k) plans as simple and low-cost as possible for all businesses, from the self-employed to companies with 100+ employees. While there are over 30 million businesses in America, there are only 700,000 401(k) plans. Every business, no matter its size, should be able to offer an affordable, easy-to-manage 401(k), giving more Americans access to one of the most powerful, tax-advantaged ways to save for the future. On this 20-year anniversary, we want to give our heartfelt thanks and gratitude to our clients across all 50 United States. Let’s look back at the milestones we accomplished to deliver on our mission to help American save! # Growing Together: Our Journey with Clients Over the Years ## 2005 - We pioneered the first entirely online quote, purchase, and setup of a 401(k) — a distinction that still sets us apart today. - We led the way with the first all index-based ([all-ETF](https://www.sharebuilder401k.com/blog/why-etfs-are-a-great-fit-for-401k-plans/ "ETFs")) 401(k) plan overseen by investment experts with proprietary models, economic data and more to help even solo business owners have 401(k) plans. ## 2006-2009 - We joined forces with Costco to spread the word that offering a 401(k) can be simple and affordable for small businesses. - ShareBuilder 401k was purchased by ING Direct, enabling us to reach even more small businesses via their large, small business client base. ## 2010-2014 - We introduced auto-pricing discounts for our clients to make sure they have one of the most affordable 401(k) plans in the country. - We expanded our fund line-up to add asset classes that performed well during the Great Recession. - We added [Customer Success Managers](https://www.sharebuilder401k.com/services-investments/overview/ "Services Overview") to provide more personal assistance to plan sponsors and training for their employees. - Launched Capital One Spark 401(k) after being acquired by Capital One in 2012 – an offshoot of ShareBuilder 401k with the same great pricing and features. ## 2015-2018 - Made 401(k)s even simpler with expanded payroll integrations, proxy voting through our Investment Committee, [saving calculators](https://www.sharebuilder401k.com/help/overview/ "Saving Calculators"), and all-new educational materials. ## 2019-2025 - The ShareBuilder 401k leadership team purchased the company back from Capital One. - Added educational videos on YouTube, created the ShareBuilder Blog, and developed more collateral to help employees learn how to be more financially savvy. - Launched our propriety and digitally simple Solo 401(k) Saver to help more self-employed businesses afford a 401(k) plan. - Launched plan health reports that give plan sponsors a clear view of how their plan compares to 401(k) benchmarks and highlight opportunities to reduce costs, boost participation, and increase employee savings rates. # The Year Ahead Much is in store for 2026, including 3(16) administrative service options and new features to help Americans build their wealth smarter while keeping costs low. Thanks again for helping us celebrate 20 years of empowering businesses and employees to build their future. We send a special shout out to the 60 plans (you know who you are!) that have been with us since the very beginning. Cheers and happy saving, Stuart Robertson, CEO & the entire ShareBuilder 401k Team

What is the Mega Backdoor Roth?

## Key Takeaways: - The Mega Backdoor Roth is an advanced version of the traditional Backdoor Roth IRA, allowing individuals to convert after-tax contributions from a 401(k) to a Roth 401(k) or Roth IRA, surpassing regular contribution limits and avoiding income restrictions. - The Mega Backdoor Roth leverages differences in contribution limits between IRAs and 401(k)s, with a substantial $70,000 limit for 401(k)s in 2025, making it an attractive option for those with higher incomes. - To make the Mega Backdoor Roth work, your plan must include after-tax contributions and allow in-plan Roth conversions or in-service withdrawals. The timing of conversions is crucial to minimize tax implications. - The Mega Backdoor Roth is most beneficial for high-income earners who can contribute more than $23,500 annually to their 401(k). - The Mega Backdoor Roth isn't available in most 401(k) plans due to the risk of failing the Actual Contribution Percentage (ACP) test, which aims to prevent discrimination in contributions between Highly Compensated Employees and Non-Highly Compensated Employees. # What is the Mega Backdoor Roth? A Mega Backdoor Roth is an enhanced version of the traditional Backdoor Roth IRA. The Mega Backdoor Roth involves converting additional after-tax contributions made to a 401(k) to either a Roth 401(k) within your 401(k) account or to your Roth IRA. This tactic enables an individual to contribute more to Roth than current IRA and/or 401(k) limits indirectly, and if converted to a Roth IRA, bypass Roth IRA income limitations. Typically, the Mega Backdoor Roth is most relevant for high-earning professionals and self-employed individuals with [solo 401(k)s](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401(k)s"). Small businesses with regular 401(k)s may face testing challenges if trying to implement the Mega Backdoor Roth. ## Understanding How the Mega Backdoor Roth IRA works To understand the Mega Backdoor Roth IRA, let's start with a brief overview of its predecessor, the Backdoor Roth IRA. In traditional IRAs, there can be contribution income limits for Traditional (or pre-tax) IRAs, and there are income restrictions for Roth IRAs. These limits vary for each type of IRA. In a Traditional IRA, if your spouse is covered by a retirement plan at work, exceeding the income limits means you lose the pre-tax deduction. In a Roth IRA, exceeding the income limits renders you ineligible to contribute, and you may need to refund your contributions during tax filing. However, there's a clever loophole: converting after-tax assets from a Traditional IRA to a Roth IRA is allowed, thus creating the Backdoor Roth IRA. This strategy lets you contribute indirectly to a Roth IRA without violating income limits. The Mega Backdoor Roth takes this concept further, leveraging differences in contribution limits between IRAs and 401(k)s. In 2025, the contribution limit for IRAs is $7,000, while for 401(k)s, it's $23,500. However, there's an overlooked limit in 401(k)s: the total contribution limit, including both employee and employer contributions, is $70,000. This substantial limit is the key to unlocking the Mega Backdoor Roth. ## Understanding After-Tax Contributions in a 401(k): In a 401(k), there are three types of contributions: traditional pre-tax, Roth, and after-tax contributions. The after-tax contribution type treats your contributions as after-tax, just like Roth, but taxes investment gains as traditional pre-tax contributions. That is, any investment gains in an after-tax “bucket” will be taxed as regular income upon a qualified withdrawal when used in retirement. So, this after-tax money type has the cons of both the traditional and Roth money types without the pros of either. Which explains why this money type is seldom used and you may not have heard of it. There is, however, one distinct advantage of the after-tax money type and that is, the deferral limit is not $23,500 (like Roth and traditional). Instead, the after-tax deferral is subject to the total contribution limit of $70,000. You will want to consider any employer matching you are receiving as that is included in reaching the $70,000 maximum. ## How Does the Mega Backdoor Roth Work? Now that we've covered the mechanics, let's assemble the pieces for the Mega Backdoor Roth. If a participant contributes to the after-tax money type in the 401(k), they will then want to convert that money to the Roth bucket. By doing this, they have backdoored their way into Roth IRA. It’s called the Mega Backdoor Roth because unlike IRAs, the contribution limit to the after-tax 401(k) is $70,000. Therefore, instead of a backdoor Roth IRA, where the limit is $7,000, the 401(k) offers the opportunity for a participant to effectively contribute $70,000 to their Roth 401(k). Hence the term, Mega Backdoor Roth. It's essentially a supersized version of the Backdoor Roth IRA within your 401(k) plan. ## Important Considerations of a Mega Backdoor Roth: To make the Mega Backdoor Roth work, your plan needs to include the after-tax contribution type and allow either in-plan Roth conversions or in-service withdrawals. Either of these features would be required to allow a participant to immediately convert their after-tax contributions to Roth, either within the 401(k) or to a Roth IRA. It is important to note the timing of these conversions matters and can have tax implications. Any after-tax money with associated investment gains will be subject to taxation when converted to Roth. Some Plans that allow for this offer an immediate conversion to Roth to avoid this scenario. ## Who Benefits from the Mega Backdoor Roth? In most cases, the Mega Backdoor Roth is most attractive to employees that earn enough income to comfortably contribute more than $23,500 per year. For context, if you earn $150,000 annually and can put away around 15% of your income, that totals to $23,500. Individuals earning over $150,000 are considered Highly Compensated Employees (HCEs) in 401(k) plans and this has implications in plan testing as you’ll see in the next section. Realistically, a participant wouldn't contribute the full $70,000 to the after-tax option. The first $23,500 would typically go to either the traditional pre-tax or Roth buckets. This means that, at most, $46,500 would be converted. Moreover, keep in mind that the $70,000 limit combines both employee and employer contributions. If your plan offers a match or non-elective contribution, this further reduces the participant's after-tax contribution capacity. For example, if a participant earns $200,000 in income and the company matches 4%, the participant could contribute $23,500 and the company would match $8,000 for a total of $31,500 towards the $70,000 limit. This participant would then be able to contribute $38,500 to the after-tax “bucket." ## Why Isn't the Mega Backdoor Roth Available in Most 401(k) Plans? 401(k) plans are subject to [IRS plan tests](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/ "Plan Testing"). These tests are designed to help ensure all participating employees can benefit fairly in a company’s 401(k) plan and not just the high earners. After-tax contributions are subject to the Actual Contribution Percentage (ACP) test. This risk of failing ACP testing is very high and is why the Mega Backdoor Roth isn't available in most plans. An employer would need a number of Non-Highly Compensated Employees (NHCE) to also contribute more than $23,500 after-tax to pass ACP testing, and that is understandably difficult. ## What is the Actual Contribution Percentage (ACP) Test? The ACP test, or Actual Contribution Percentage test, focuses on contributions, including employer matching and after-tax contributions, to determine if the plan is favoring HCEs (those earning $150,000+ annually) over NHCEs. Like the ADP test, the ACP test aims to prevent discrimination in plan contributions. It calculates the average contribution percentages for both groups and compares them. If the contribution gap surpasses specified thresholds, the plan may fail the ACP test, potentially triggering the need for refunds or adjustments to maintain fairness and compliance within the plan. ## Final Thoughts: The Mega Backdoor Roth could be a powerful tool for those who can utilize it effectively. Unfortunately, few companies have the right mix of HCEs and Non-HCEs making after-tax contributions for the plan to pass testing. If your company does have the specific demographics and contributions to meet testing parameters, you will want to ensure your plan documents and plan provider will support it. If you're looking to set up a 401(k) for your business, check out [what product will work](https://www.sharebuilder401k.com/products-pricing/plan-designs/ "Plan Designs") for you. For any questions, feel free to give us a call at (800) 431-7934. **Please note that catch-up contributions for individuals aged 50 and over are additional and not included in the discussed contribution limits. *This is not meant to be tax advice. ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.

Why is it called 401(k)?

# How did the 401(k) start? You may wonder how did the 401(k) come to be, and why has it become the de facto standard for most Americans? In building for a healthy retirement, the concept of the three-legged stool has been the aspirational approach since 1949. It includes: 1. Social Security to help keep any American out of poverty but not much more 2. Employer benefits such as a 401(k) or pension – the key for most 3. Personal Savings – those that get ahead of the game with emergency plus savings Some people may not have all three legs, as they don’t have access to retirement benefits or don’t do a particularly great job of building personal savings; and will have to rely on the one or two legs they have. ## Retirement Benefits in the United States and How it Started Before we dive into the evolution of [the 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-401k-and-how-does-it-work/), it’s important to understand where we began. When we became a country, there was no such thing as retirement benefits. We were a very agrarian society at the time, people often worked until they died, and of course, most people did not live as long. Consider that in 1900, the average American lived to 47 years of age. ## What is a pension plan? Pensions started in the US after the revolutionary war for veterans and were approved and funded by the US government. Yet, the first private sector pension plan did not start until 1875. For the private sector, the employer fully funded the pension for the employee, which sounds desirable to most all of us. Early adopters of pensions in the late 1800s and early 1900s were in more “dangerous and physically hard” industries such as railroad and mining. As more pensions came to be, there were significant qualifiers such as 10- to 20-year tenure requirements, age restrictions, and more. And while there is a perception that most Americans had access to pensions prior to the 401(k) that is far from the case. As the industrial revolution came into full swing, more well-paying jobs developed in cities. The Great Depression drove the beginning of Social Security in 1935 legislation, since it became apparent the U.S. had no backstop with the development of a more modern work life. As our country and businesses grew, many large businesses adopted pensions and by 1980, it is estimated 38% of Americans had access to a pension. With the advancements in medical care, wealth, and living standards, we began living longer. By 1950, the average American was living to be 68 years old. Today, the average is around 80. Longer lifespans mean longer retirements, and that creates very significant business liabilities for pension plans. This was a core driver that helped cause the decline of pensions benefits over the last 40 years or so. Before, a pension planning to cover 3-8 years for a retired employee was a manageable liability for a business. When this changed to 15-30 years for most retired employees, pensions became a large liability for companies to manage. In fact, pension liability not only impacted in a business investing for growth, but it could also impact the very survival of a business if the liability grew too large. Before there was pension insurance, if a company failed most, if not all, the pension benefits were gone for that company and its employees. Basically, managing market risks and aligning payouts with the growing length of retirement grew more and more complex and costly. Ensuring jobs and business growth are obviously the first priorities of a company; not finding a means to fund pensions. And perhaps a little by accident, the solution to make retirement benefits more widespread and less a burden for a business was about to present itself. ## How did a 401(k) start? In the Revenue of Act of 1978, section 401(k) created what has evolved to be America’s most popular retirement solution. At first, it wasn’t situated to take on what is needed to truly be the third leg of the retirement savings stool. The 401(k) was initially designed to be a suitable replacement for executive [profit sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/) plans and ensure more employees were included. The 401(k) provides tax advantages for both employees and employers to contribute to the retirement plan. But as regulations better supported the 401(k) solution to be a flexible retirement plan that could cover employees without all the pension liabilities, companies started preferring 401(k)s. ## A Lot of New Features Enabled 401(k)s to Be a Strong Retirement Benefit 401(k) plans needed to evolve to really be an effective means for Americans to be retirement ready, and they really have. Most of the key legislative changes over the last 40+ years are providing more Americans access to a 401(k), enabling more small businesses to offer a plan, making it simpler to enroll employees, and allowing tax-deferred and Roth contributions to help more Americans build meaningful nest eggs. Some of the highlights include: - As 401(k) plans are meant to benefit all employees, not just high earners, IRS tests were instilled in 1986 to help ensure this was the case. - Yet, testing could make it difficult for small businesses to offer a plan, so the [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/) feature was added in 1996 as part of the Small Business Job Protection Act. This plan design automatically satisfies IRS testing needs of the business. - Getting participants to enroll could be an issue, and in 2000, [automatic enrollment](https://www.sharebuilder401k.com/blog/what-is-401k-automatic-enrollment/) was enabled and further enhanced in future legislation. This feature automatically opts employees into the plan and has proven effective in getting more Americans to start saving in their 401(k) plan. - In 2001, The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) enabled: - Catch up contributions for those 50 and older. - Introduction of the [Roth 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/) feature that became effective in 2006. - Most recently, Secure Act 2.0 of 2022 enables: - More [tax credits](https://www.sharebuilder401k.com/blog/secure-act-2.0-401k-tax-credits-for-small-business/) for small business to cover the cost of 401(k) benefits. - Employers to match Roth contributions vs. just tax deferred contributions. (Roth was only available for employee contributions previously). - [Automatic enrollment](https://www.sharebuilder401k.com/blog/what-is-401k-automatic-enrollment/) for 401(k) plans as of 2025. - More part-time workers access to 401(k) – 500 hours of work for two consecutive years will be provided access to their company plan as of 2024. - Employers to provide gift cards as an added incentive to participate. 401(k)s are now estimated to cover more than 2/3rds of Americans. Compared to pensions, that is a big increase. Automatic enrollment and automatic paycheck deductions have helped many Americans build a nest egg. The evolution of model portfolios and target date funds have helped more Americans who are inexperienced in investing to get off on the right foot. While more can be done – especially in growing access to 401(k)s as close to 100% as possible -- to further improve 401(k)s, you can see how 401(k)s have evolved to be the preferred retirement savings solution for Americans. ## Takeaways: - Beyond some public sector coverage typically for veterans, retirement benefits were not available in America until 1875 with the first private pension plan. There were only a little over 300 companies offering pension plans in 1919. Social Security did not come into being until 1935. - The concept of three-legged stool for retirement came to be in the mid 1900s. It consists of Social Security, Retirement Benefits, and Personal Savings. However, many people did not have access to retirement benefits even with the growth of pensions. - With the advent of the Industrial Revolution, better medical advances and diets, Americans began living longer, and our thinking about retirement solutions started to evolve. - With longer life spans, pension plans became a large liability for companies to manage. - The 401(k) was part of legislation that was enacted in 1978 to help create incentive to cover more employees receiving tax-advantage profit sharing. - Over the last four decades, numerous changes to the 401(k) features and rules have enabled it to be a robust, flexible retirement solution. 401(k)s became more and more popular for businesses to offer and have increased coverage of retirement benefits in America. - Key enhancements to 401(k)s include the Roth 401(k), catch-up contributions, a Safe Harbor 401(k) design to make it simple to administer for small businesses, and generous tax credits for small businesses to start a 401(k). - Automatic enrollment, automatic contributions via payroll, target date funds, and model portfolios have helped make it simpler and better for employees to contribute and build for a comfortable retirement.

Is America Headed Towards a Retirement Crisis?

# Retirement Crisis or Underfunded Retirement; What’s the Reality for Most Americans? Over 30 years ago, the first reports that a retirement crisis loomed for America started to hit the news cycle. Concern of a looming retirement crisis began as fewer companies were offering pensions, the first worries regarding Social Security solvency emerged, and research indicated insufficient retirement savings for many Americans. During this time and since, 401(k)s became much more prevalent with the decline of pensions, and the onus shifted more to the individual versus the employer for helping to ensure adequate retirement income. There is a nostalgic belief that before the 401(k), most Americans had access to a pension program, which in reality simply isn’t true. At the height of pensions in the late 1970s and early 1980s, only 38% of Americans had access to a pension according to the US Bureau of Labor Statistics, and even fewer qualified to receive a pension due to strict vesting rules around years of service (generally 5-10 years). Compare that to [over 73% of civilians](https://www.bls.gov/opub/ted/2023/73-percent-of-civilian-workers-had-access-to-retirement-benefits-in-2023.htm) now having access to a retirement plan as of March 2023, according to the Bureau of Labor Statistics. Yet the drumbeat of a retirement crisis continues. There are real fears that each generation won’t have enough to live on during their retirement given added factors like longer lifespans, rising healthcare costs, poor saving habits, inflation, employment trends, and more. But wait a second! How are we in a retirement crisis if more people have access to retirement funds than ever did during the golden age of pensions? Are we really on the brink of a full-on retirement crisis? Or is it potentially more of an underfunded retirement? This article will discuss both, the growth of retirement plan coverage, but most importantly, how you can take control and live a financially secure retirement. ## What is a Retirement Crisis versus an Underfunded Retirement? A retirement crisis is when a large portion of the population will outlive their savings and will live in poverty and/or be reliant fully on the government (e.g. Social Security and other programs) to survive. This may also put strain on younger generations due to potential tax increases to help fund government programs as well as trying to help with their elderly family members’ expenses. On the other hand, an underfunded retirement is when a large portion of the population has some personal and/or retirement savings, but not enough to live at the same standard of living as pre-retirement. This can often mean living on less or could require working longer, well into retirement years, to live at a similar standard of living. ## The Three Pillars of Retirement for Financial Security The three-legged stool analogy has driven the general thinking on how to be financially prepared for retirement. The pillars include: 1. Saving in a retirement plan 2. Personal savings 3. Social Security benefits A note on Social Security: Social Security is designed to help care for the very basic of needs so that the most vulnerable can have some economic security and avoid homelessness. It can be a great supplement even for those with savings, although there are questions about how to continue to fully fund Social Security in the years ahead. Because of this uncertainty, it’s more important to focus on a retirement plan and personal savings as the key to living a financially robust and secure retirement. ## 401(k) Growth and Greater Access to More Americans is Making a Difference Before 1980, there was no such thing as a 401(k), and pensions covered fewer than 38% of Americans. As mentioned before, 73% of civilians now have access to a retirement plan with the 401(k) being the most common. The growth of 401(k)s has been a huge benefit for Americans to build for retirement, and has [continued to evolve](https://www.sharebuilder401k.com/blog/changes-coming-to-your-401-k-in-2025/) to better meet their needs. High contribution limits, [tax advantages](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/) of tax-deferred or [Roth 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/) savings, automatic enrollments, [payroll integrations](https://www.sharebuilder401k.com/blog/how-payroll-integrations-work-with-401ks/), and employer matching have made 401(k)s a simple, smart way to save. In many ways, the 401(k) has become the strongest foundational leg of the retirement pillars. However, the 401(k) still has more room to grow. The biggest opportunity to covering more Americans is for more self-employed (yes, there are [Solo 401(k) plans](https://www.sharebuilder401k.com/products-pricing/solo-401k/)) and small businesses to start a plan. While a 401(k) is a cost-effective benefit, fewer than 25% of small businesses offer plans and likely less than 8% of the self-employed use a Solo 401(k). ## Why the Alarm Bells of a Retirement Crisis? Beyond Americans living longer post-retirement and high health care costs as we age, many Americans will not attain what industry experts suggest as enough money for a comfortable retirement. The [common guideline for retiring](https://www.sharebuilder401k.com/blog/how-much-money-do-you-need-to-retire/) comfortably is to build savings to ten times your annual earnings by age 67. Quite a few of us may not reach this target, but that doesn’t mean we’ve reached a “crisis”. Many can choose to work longer, others to live on less, and some have other family members or resources to lean on. So, while a retirement crisis is not likely looming for most, being underfunded in retirement is a real risk. Do be fully aware that the lowest quarter of wage earners, have and remain the most at risk of serious financial struggles now and upon reaching retirement age. ## How You Can Avoid an Underfunded Retirement To put yourself in the best position to avoid a poorly funded retirement, here are some best practices: Strive to put 10-15% of your earnings in your retirement account each paycheck for your entire career. If you have a 401(k) with an employer that matches, the company match counts towards this goal. At minimum, ensure you are receiving the match. If you don’t have access to retirement plan at your place of work, start an IRA and make [contributions](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/) up to the maximum allowed. If you started late with your retirement savings, know that there are catch-up options in your 401(k) when you reach 50 years of age that can help. There are [targets to shoot for](https://www.sharebuilder401k.com/blog/how-much-money-do-you-need-to-retire/) that can help you think about where you are and tactics to consider. Build a rainy day fund. Early in your career this may be one to three months of your earnings and then expanding to a full year as you become a big earner. As you approach retirement, having two years of expenses covered in a high interest savings or money market account is key to weathering financial [market downturns](https://www.sharebuilder401k.com/blog/how-to-think-about-investing-when-markets-fall-quickly/). Bonus tactic for the self-employed and small business owners: start a 401(k) plan and reap the tax credits and deductions that make these plans very affordable.¹ So, while many may struggle with an underfunded retirement, there’s a lot you can do to boost your savings while you are still working. Do know that making smart money saving moves and diversifying your savings can be a big help no matter what the future holds. Here’s to a healthy retirement (and to avoiding the retirement crisis altogether!). ## Takeaways: - Since the 1990s, there have been consistent concerns that a large population of Americans will outlive their savings, resulting in mass poverty, reliance on the government for assistance, and financially burdening younger generations. - However, the vast majority of Americans are likely in a position to meet their retirement saving goals or be somewhat underfunded but will likely avoid a financial crisis. - 401(k) plans have dramatically increased the coverage and access to a retirement plans for Americans at a vast increase from the peak of pensions. - The three pillars of retirement plan savings, personal savings, and Social Security are considered the means to funding a secure retirement. - Any size business can start a 401(k) plan, and there are tax credits and deductions to further minimize costs. - Experts advocate that you can build a financially secure retirement by saving 10-15% of your earnings over your career. This can be through your company retirement plan, personal savings, or both. ¹*Sharebuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.*

401(k) Nondiscrimination Testing

# 401(k) Nondiscrimination Testing: How to Stay Compliant and Avoid Refunds 401(k)s are designed to benefit all employees, and if you have employees, the plan is subject to government tests to help ensure they do. Nondiscrimination testing in 401(k) plans, known as Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing, is a critical requirement for employers offering traditional (non-safe harbor) retirement plans. These tests ensure that 401(k) benefits do not disproportionately favor Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs). If you have a [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/) plan design, it automatically satisfies these tests. In this blog, we’ll break down what these tests mean, how they work, and what to do if your plan fails. You’ll learn: - What is 401(k) nondiscrimination testing? - How do the ADP and ACP tests work? - What happens if your 401(k) fails testing? - How can you avoid failure with safe harbor and other strategies? ## What is 401(k) nondiscrimination testing? [401(k) nondiscrimination testing](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/) ensures HCEs do not benefit unfairly from a retirement plan. The IRS mandates annual nondiscrimination testing for most 401(k) plans to prevent favoring owners or high earners. These tests compare deferral and contribution rates between HCEs and NHCEs, promoting fairness and regulatory compliance. ## What are the ADP and ACP tests? The ADP and ACP tests compare employee and employer contributions between HCEs and NHCEs to ensure plan fairness. ADP (Actual Deferral Percentage) tests how much employees defer from salary (excluding catch ups). ACP (Actual Contribution Percentage) evaluates employer match and voluntary after-tax contributions. A plan fails if HCEs’ average rates exceed allowable thresholds, typically tied to NHCE averages (such as 125%, 200%, or plus 2%). ## Who qualifies as a Highly Compensated Employee (HCE)? An HCE is someone who owns over 5% of the company or earned more than $160,000 in the previous year. IRS guidelines define HCEs in two ways: 1. Ownership: More than 5% of the business in the current or prior year. 2. Compensation: Earned over $160,000 in 2025. If more than 20% of employees earn above this threshold, you can elect to limit the HCE group to only the top 20% of employees by compensation using the IRS-approved Top Paid Group election. This helps reduce the number of employees considering HCEs for testing purposes. ## What happens if your plan fails discrimination testing? Failed testing requires corrective action, usually in the form of refunds to HCEs. If your plan fails ADP or ACP testing: - Refunds must be issued to HCEs by March 15 (if your plan ends on December 31st). - A 10 percent excise tax applies to late refunds. - Plans can avoid recurring issues by switching to a [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/) structure. ## How can you prevent future testing failures? Employers can avoid nondiscrimination failures through several strategic options. Adopt a Safe Harbor 401(k): Automatically passes testing if contributions and notice rules are met. Boost NHCE participation: Setting Auto-enrollment at 5% or more of salary deferrals, and financial education can improve your employee compensation ratios. Explore advanced testing strategies, such as limiting the HCE group using the Top Paid Group election or separating newly eligible employees through Permissive Disaggregation, which can help improve your plan’s testing results. Learn more about these IRS-approved testing options or consult your 401(k) provider for guidance. ## What is a Safe Harbor 401(k) plan? A Safe Harbor 401(k) automatically satisfies ADP and ACP testing rules by making mandatory employer contributions. Types of Safe Harbor contributions include: - Basic match: 100% match on the first 3% plus 50% on next 2 percent - Enhanced match: Must be at least as generous as the basic match - Nonelective contribution: A flat 3% of compensation is contributed to all eligible employees, including both NHCEs and HCEs, whether or not they contribute to the 401(k) plan. Safe Harbor plans also often avoid top-heavy testing, offering administrative ease and plan reliability. ## Are there other 401(k) compliance tests? Yes. The Top-Heavy Test and Coverage Test also play key roles in compliance. - Top-Heavy Test: Ensures key employees do not hold more than 60% of plan assets. - Coverage Test: Confirms contributions benefit a broad enough group of NHCEs. These tests ensure equitable participation and prevent the disqualification of your company’s plan. ## What if I’m setting up a new 401(k)? New plans using prior year testing can assume a 3% NHCE deferral rate unless they set auto enrollment at a higher percentage. Assuming 3%, this gives HCEs a predictable threshold (typically 5%) in year one. Consider starting with a Safe Harbor plan to avoid uncertainty and increase plan success from the start. ## How ShareBuilder 401k Helps You Stay Compliant At ShareBuilder 401k, we offer full service 401(k) plans built with compliance in mind. Whether you're launching a new plan or switching providers, our platform helps: - Design a plan that passes ADP and ACP testing - Offer Safe Harbor solutions - Educate your employees and encourage participation - Proactively monitor contribution rates ## Key Takeaways 1. __What is 401(k) nondiscrimination testing?__ - It ensures retirement plans do not favor Highly Compensated Employees (HCEs) over Non-Highly Compensated Employees (NHCEs) by comparing contribution and deferral rates. 2. __What are the ADP and ACP tests?__ - These IRS tests check if employee deferrals and employer contributions unfairly favor HCEs. - The Actual Deferral Percentage (ADP) test measures the average percentage of compensation that Highly Compensated Employees (HCEs) defer into the 401(k)-plan compared to Non-Highly Compensated Employees (NHCEs). It ensures that HCEs are not contributing significantly more than NHCEs. - The Actual Contribution Percentage (ACP) test measures the average percentage of employer matching and after-tax contributions made for HCEs versus NHCEs. It ensures employer contributions are distributed fairly across employee groups. - A plan fails if the average rate for HCEs exceeds the IRS limits based on NHCE contribution averages. 3. __Who qualifies as a HCE?__ - Anyone who owns more than 5% of the company or earned over $160,000 in the prior year. 4. __What happens if your plan fails testing?__ - Refunds must be issued to HCEs, and a 10% penalty applies to late corrections. 5. __How can you avoid testing failures?__ - Find a 401(k) provider that can help you educate employees or use testing strategies like Top Paid Group elections.

What is 401(k) plan testing?

What’s that you say – there’s a 401k plan test to pass? Well, it’s not like a test in school at all, and your 401k plan provider should make this simple to manage – or better – you can select a [plan design](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "Safe Harbor 401(k) Plans – More Savings, Less Hassle") that automatically satisfies these tests. All 401k plans except [Solo 401ks](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401k Plan Information and FAQs") are subject to government tests to help ensure the plan is serving the best interest of employees and not just high earners. __401k Tests Help Ensure Your Plan Is Benefiting All Participating Employees__ Yes, 401k plans must be run in the best interest of employees and are meant to benefit all fairly. In particular, the IRS wants to ensure that non-highly compensated employees (NHCEs) are benefiting from the plan, and that highly compensated employees (HCEs) aren’t unfairly benefiting from the plan. In 2025, NHCEs are defined as those earning less than $155,000 per year, and HCEs are those earning $155,000 or more. HCEs also include any employee who is a 5% or greater owner in the firm and/or immediately family of an owner. __401k Non-Discrimination Tests__ There are non-discrimination tests every 401k plan must satisfy. The tests consider salary deferral percentages and employer contributions for both populations to ensure the plan is well managed and needs no corrective actions. These are called: 1. __Actual Deferral Percentage (ADP) Test__ – this test looks at the __employee__ salary deferral amounts over total compensation by HCEs and NHCEs. There are several ways to pass the test. If the ADP for the eligible HCEs doesn't exceed the greater of: - 125% of the ADP for the group of NHCEs, or - the lesser of: • 200% of the ADP for the group of NHCEs, or • the ADP for the NHCEs plus 2%. Many plans use the last criteria to pass. For example, if NHCEs are deferring 6% of salary on average, an HCE may not contribute more than 8% of their salary to their own 401(k) account. 2. __Actual Contribution Percentage (ACP) Test__ – this test considers the __employer__ received contributions to the 401k plan by NHCEs and HCEs. The ACP test is met if the ACP for the eligible HCEs doesn't exceed the greater of: - 125% of the ACP for the group of NHCEs, - or the lesser of: • 200% of the ACP for the group of NHCEs, or • the ACP for the NHCEs plus 2%. A company may base the ADP and ACP percentages for NHCEs on either the current or prior year contributions. The election to use current or prior year data is in the plan document that will accompany any 401k plan as it gets established. __How to Automatically Satisfy ADP/ACP 401k Plan Tests__ The most common and popular plan design for businesses with less than 100 employees is called a [Safe Harbor 401k plan](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "Safe Harbor 401(k) Plans – More Savings, Less Hassle"). Safe Harbor 401k plans make it easy for business owners to maximize contributions to their own accounts as they automatically satisfy the required IRS non-discrimination testing. Businesses that choose a Safe Harbor plan must either: - Make a dollar-for-dollar matching contribution for all participating employees on the first 4% of each employee's compensation (this is the most popular option), OR - Contribute 3% of the employee's compensation for each eligible employee, regardless of whether the employee chooses to participate in the plan. All matching contributions are vested immediately. Safe Harbor plans work particularly well for firms that have consistent revenue streams. Businesses that don’t want to provide this kind of match or find it difficult to maintain matching levels year-round may prefer a [Traditional 401k plan design](https://www.sharebuilder401k.com/products-pricing/plan-designs/ "401k plan design options and comparisons"). If you don’t prefer a Safe Harbor 401k plan design, another savvy way to pass these tests is to setup [automatic enrollment](https://www.sharebuilder401k.com/blog/what-is-401k-automatic-enrollment/ "What is automatic enrollment") with an employee salary deferral level of 10% or more (15% is the highest you may set it). This way, many of your employees will be participating given they are automatically enrolled (they can always opt out) and will be contributing at a deferral level that can help them build a meaningful nest egg. Meanwhile, HCEs are able to contribute a high percentage as well often up to the [401k personal limit](https://www.sharebuilder401k.com/blog/2022-401k-contribution-limits-ira-and-roth-limits-and-more/ "2022 401k and IRA contribution limits"). Know that these tests are not really very daunting at all and many, many businesses of all shapes and sizes offer 401k plans. While at first blush, these tests may seem complicated, they can be simple to satisfy and manage with either the right plan design or features no matter your business size or need.

What 401k Plan Services Your Business Will Need and Value

When researching providers to start your first 401(k) plan (or switch from a provider that is lacking), you may be unsure what services to expect or are really needed for that matter. We believe the best providers pair great people with great technology to meet and exceed your needs while keeping costs in check. Some will be good in one area and weak in another. At ShareBuilder 401k, we say demand both! Here are the core 401(k) services you need to know about, and what you will want to ensure your provider will offer: ##### 401(k) Provider Services Overview | Service | What You'll Want | What to Avoid | | ------------ | ---------- | ---------- | |401(k) Advisors | Salaried professionals (SEC licensed advisor is preferred) that provide expert guidance on 401(k) plan design and investing for retirement. | 100% commissioned sales rep, financial rep who does not specialize in 401(k)s, and/or those that earn their income on 12b-1 pass through fees from investments. Earning 12b-1 fees on funds can bias investment “recommendations” and may increase investment expenses.| | Digital Purchase and Setup| A digital process enables quick purchase and efficient setup so you can get up and running. | Paper-based setup is surprisingly common and can take literally weeks to complete with the back and forth. | | Education and Kick-off| A mix of digital and personal education for you and your employees including: 1) 401(k) advisor hosts an employee education kick-off, ongoing questions and hosts other meetings as you desire, 2) Digital guides, videos, and calculators for 24x7 education access for employees, and 3) Blogs and proactive education emails.| To best manage your plan and support you and your employees, missing any of the items listed in “What You’ll Want” can leave you managing more questions or worse as employees may make bad decisions. Some providers may even want to charge you for having people support your plan.| | Call Center 800# and Email Support| You’ll want your provider to offer an 800# line for your employees with a strong service level (e.g. 80% of calls answered in 20 seconds or less) during business hours as well as reply to most emails same day and no later than within 24 hours. | Unfortunately, some providers have your employee calls go to voice mail and may not return your call or email for days. We suggest avoiding these.| | Employer/Plan Sponsor Technical Hotline| You may need support streamlining payroll with uploads or integration, reviewing plan compliance testing, and/or year-end digital questionnaires. An 800# hotline makes it simple for you to knock these items out when they arise.| We suggest you’ll want to ensure your provider offers this as it can be frustrating to complete tasks like these when they arise if you choose one without it.| | Investment Management Expertise| Some providers have a professional [Investment Committee](https://www.sharebuilder401k.com/services-investments/investment-philosophy "Investment Committee Services") that manage the investment roster for your company’s plan. This service is known as an [ERISA 3(38) advisor](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles "Different Types of 401(k) Advisors ") and it's the highest level of service in terms of fiduciary role and work a provider can take on for your investment offering. This saves you the time, energy and expense of managing these reviews on your own and provides added fiduciary protection for you and your business too. | While you can take this on yourself or go with a provider’s “suggestions,” it means you take on added risk and duties to support the investment offering in your plan. Many employers don’t have access to the financial tools, experts, or other resources to do this at a high level.| | Compliance, IRS Testing & Audit Support| 401(k) plans have rules and regulations to manage to and must be run in compliance including annual IRS tests. Plans with over 100 employees require audits. A team and access to tools to ensure your plan is compliant are the preferred solutions for most. A good provider will also provide you a signature-ready [form 5500](https://www.sharebuilder401k.com/blog/what's-a-form-5500 "What is a 401(k) form 5500?") each year (Solo 401k plans won’t require testing and won’t require 5500 until they have $250K in assets).| Providers that provide limited or no support to run your plan in compliance.| Look for a 401(k) provider that provides you a high level of service and keeps employee investment and fund expenses all-in well under 1%. This helps make your 401(k) benefits easy to run and helps ensure more of your retirement money is staying invested in the markets for tomorrow too. Visit our [services tab](https://www.sharebuilder401k.com/services-investments/overview "401(k) Services Overview") to get a deeper view of the support you’ll likely want.

Roth 401k advantages over Roth IRAs

While you may have heard of the Roth IRA, there’s a bigger and stronger retirement feature available in many 401(k) plans called the Roth 401(k). It can be a great way to protect your future savings against tax rate increases and/or climbing into a higher tax bracket in retirement. Contrary to popular belief, the Roth 401(k) isn’t a new plan – it’s simply a feature available in a 401(k), and it can help you save more retirement dollars than its little brother, the Roth IRA. You can choose to put some, none or all your contributions after-tax into your Roth 401(k), saving up to $22,500 in 2023, or $30,000 if you are 50 years of age or older. Compare this to the Roth IRA, which only allows a maximum contribution up to $6,500 in 2023 ($7,500 if age 50 or over). ##### Roth 401(k) vs. Roth IRA | **Attributes** | **Roth 401(k)** | **Roth IRA** | | ------------ | :----------: | :----------: | | Contribution Limit (2024)| $23,000 | $7,000 | | Age 50+ Catch-up Amount (2023)| $7,500 | $1,000 | | Roth Income Limit| None | $165,000* | Roth tax rules are the exact opposite of how traditional tax-deferred 401(k) contributions work. Your tax-deferred contributions will be taxed when you withdraw the money at retirement; however, you receive no tax deduction on Roth contributions. The benefit is that your Roth withdrawals (including investment gains) can be taken tax-free when you reach retirement. It’s important to note that any employer match or profit sharing into your 401(k) will always be on a tax-deferred basis as required by law. __Roth 401(k) Has No Income Limits__ Unlike the Roth IRA, there is no income limit for contributing to a Roth 401(k). Anyone can have one if their employer’s plan offers this feature. To invest in a Roth IRA and make the maximum contribution, modified adjusted gross income must be below $138,000 if single or $218,000 if married and filing a joint return. If you don’t have the Roth option in your company 401(k) plan, it’s a great idea to request it. This typically requires an amendment to the plan that’s a minor cost to the business owner. __Tax Hedging Your Nest Egg and Maximizing Your Money__ It’s anyone’s guess what tax rates will look like 10, 20, or 30 years from now – let alone knowing what tax bracket you’ll wind up in. Many believe tax rates are only headed up in the years ahead. Others aren’t so sure. If you’re early in your career and climbing the corporate ladder, it’s likely you’ll graduate to higher tax rates by the time you retire. So, whether you believe tax rates are headed up and/or are climbing the job ladder, a smart strategy can be to divide your contributions between tax-deferred and after-tax (Roth 401(k)). This allows you to hedge your retirement savings and enable more options on how to use your money and manage tax implications in retirement. For instance, you can take money out of the Roth during years when you need to spend more and your tax bracket is higher, and then use the traditional 401(k) funds when your spending is lower. The Roth 401(k) is a nice big brother to have on your side. There’s no better time than now to consider your needs for the future and be in a strong position to get the most out of your savings. *This article was updated with 2025 contribution limits and applicable figures.* **In 2025, Beginning at $150K, the amount you are allowed to contribute begins to decrease, hitting $0 at $165K for singles (range is $236K to $246K for married couples filing jointly) [Roth 401(k)](https://www.irs.gov/retirement-plans/roth-comparison-chart "IRS Roth Comparisons")*

How Much Should You Contribute to Your 401(k)? | ShareBuilder 401(k)

# Understanding How Much to Contribute to Your 401(k) If you’re thinking about this, you are likely considering how much you need to put away to have enough saved for retirement and/or potentially provide some money to your heirs or estate. Building your retirement savings doesn’t need to be overly complex, and it’s something you can do especially with access to 401(k) benefits. While the ever-changing economic landscape and markets may seem daunting at times, the help of ample 401(k) contribution limits, time, and understanding how much to put towards your retirement plan can help you build a healthy nest egg. In this blog post, we will guide you through the key considerations, target savings, and provide insights on determining the right contribution amount for you. We will also address some frequently asked questions about 401(k) contribution limits, 401(k) withdrawals in retirement, and what happens if you overcontributed to your 401(k) in any given year. ### How Much Should I Contribute to My 401(k)? Many financial advisors suggest saving 10-15%* of your income over your career for a comfortable retirement. This can be easier if your company’s 401(k) plan offers an employer match as that counts towards this savings percentage too. Plus, a 401(k) match is essentially free money or a bonus if you will. If you start saving mid-life or later, you may need to save more than 15% of your income to try and catch-up. Regardless of where you are, you can build meaningful retirement savings by assessing where you are and knowing the products, features, and retirement contribution limits as well as understanding some key concepts such as the power of compounding. ### Assess Your Current Retirement Savings to See Where You Stand There are some general saving targets by age that can help you consider how much more or less you may want to work to save. While some tout a retirement number, your goal is unique to you. You may also want to consider other accounts or inheritance you might expect to receive in determining where you stand. Here are some general retirement saving guideposts for reference: | Your Age | Amount Saved for Retirement| | ------------------------------- | -- | | 30 | 1x Salary | | 40 | 3x Salary | | 50 | 6x Salary | | 60 | 8x Salary | | 67 | 10x Salary | You can also run different scenarios with this [Savings Calculator](https://www.sharebuilder401k.com/help/savings-calculator/). ### How Much Will My 401(k) Pay Me Per Month During Retirement? While the retirement saving targets provide some good context, the monthly income you can expect from your 401(k) during retirement depends on numerous factors, including the total amount saved, income from other sources, the strategy you choose for withdrawals, and how long your retirement lasts. Also think through how your expenses may change and any other sources of income. Will your home be paid off? Will you downsize houses for added savings? Will you be free of supporting children or encounter aging parent expenses? Do you plan to travel more? Also consider Social Security, an inheritance, dividends from other investing accounts, or a part-time job that may provide you with additional income. The '4% rule' can serve as a useful guideline of how much your 401(k) (and other investing accounts) might provide you each year in retirement. This strategy suggests that you withdraw 4% of your total 401(k) balance in the first year of retirement, and then adjust that amount each year for inflation. This [How Long Will My Money Last](https://www.sharebuilder401k.com/help/401k-income/) calculator can help you further refine how long your savings can last applying various scenarios. ### How the Power of Compounding Helps Your 401(k) Contributions Grow Before discussing tactics to help you boost savings, it’s important to understand the power of compounding. The principle of compounding plays a crucial role in the growth of your 401(k) balance and other investing accounts. This phenomenon describes the impact of earnings (such as interest, dividends, and capital gains) on your initial investment and on earnings from previous periods. Contributing regularly to your 401(k) helps you take advantage of the power of compounding over your working career. With compounding the interest and dividends you earn on your 401(k) investments are reinvested helping you earn even more over time. Let's consider a hypothetical example where you contribute $10,000 per year to your 401(k), and your employer provides a match of an added $4,000 per year. Suppose your 401(k) earns an average annual return of 8%. Over 40 years, your total contributions, including your employer's contributions, would equal $560,000. However, thanks to the power of compounding, your 401(k) balance would have grown to nearly $4,100,000! We think that’s pretty cool. ![Compounding Chart](//images.ctfassets.net/wsuay9fbp17w/3MiBxFjevpGVqln8hcL606/6eb380493d9ac304ede5e1ba939b4926/MicrosoftTeams-image__13_.png) ### Tactics to Help Increase Your Retirement Savings For most of us once we assess our financial situation, figuring out how to contribute more to build a bigger nest egg is our goal. Here are some tactics that can help you increase your savings: 1. If it works with your current [budget](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart/), simply login to your 401(k) and increase your salary deferral amount to your 401(k). 2. If you don’t have budget at this moment to increase your 401(k) contributions, when you receive your next merit raise or promotion, increase your 401(k) deferral amount by a similar percentage. You’ll be living on a similar or better budget today while saving more for tomorrow. 3. Ensure you are receiving all of your company’s 401(k) match. If a budgetary issue has prevented you from doing so, do look at ways you may be able to cut somewhere to get this “free” benefit from your employer. It can be a big help. 4. If you are at least 50 years old, you can take advantage of catch-up contributions. You can save an additional $7,500 per year towards your 401(k) account. See below for current 401(k) contribution limits. 5. Review how you are investing and see if you have the right strategy and asset allocation that fits you. If you need to learn more on this subject, give [this blog](https://www.sharebuilder401k.com/blog/how-much-you-put-in-stocks-bonds-and-cash-is-a-big-deal-for-your-401k-savings/) a read for perspective. ### How Much Can I Contribute to My 401(k)? As of 2025, the IRS (Internal Revenue Service) has increased the annual 401(k) employee contribution limit to $23,500, up from $23,000 in 2024. This is due to inflation adjustments based on U.S. cost of living increases. For those aged 50 or over, 'catch-up' contributions are available. These have been raised to $7,500 for 2024. This means that if you are 50 or older, you can contribute a total of $30,500 to your 401(k) in 2023, excluding any employer match. | 401(k) Limits for 2025 | | | | ----------------------------------- | -- | -- | | | 2025 | 2024 | | Employee contribution limit | $23,500 | $23,000 | | Annual limit per individual | $70,000 | $69,000 | | Age 50+ catch-up amount | $7,500 | $7,500 | | Annual compensation limit | $350,000 | $345,000 | | Highly compensated employees | $160,000 | $155,000 | ### What Happens If I Contribute Too Much to My 401(k)? While for many it can be tough to reach the 401(k) contribution limit, people who over contribute to a 401(k) in a given year can be taxed twice on the amount above the contribution limit plus a 10% early withdrawal penalty if you are under 59.5 years old. There are ways to correct and avoid these costs if done in a timely manner. Most 401(k) plans are supported with recordkeeping systems that help prevent you from exceeding the maximum you are allowed to contribute to your 401(k) account each year. However, for those that do not, or in instances where highly compensated employees are not allowed to contribute the maximum allowed due to restrictions of the plan design and over contribute, it can be costly. Check with your company plan sponsor to see if you have systems and notifications in place to prevent this, or if you need to do something additional to stay on top of this. ### Key Takeaways: - Strive to save at least 10-15% of your income for retirement, but the exact figure should align with your financial circumstances, when you start saving, and your goals. - The income you can expect from your 401(k) during retirement will depend on your total savings, withdrawal strategy, other sources of income, and retirement duration. The 4% rule can be a helpful guide to get an idea. - Assess your situation and how much you might expect to withdraw in retirement, and then apply 401(k) tactics such as receiving your employer matching contribution, using catch-up contributions, and/or adjusting your investing strategy to get on track. - The power of compounding can significantly amplify your 401(k) savings over time, emphasizing the importance of starting as soon as possible and contributing regularly. - For 2025, the 401(k)-contribution limit is $23,500, and those aged 50 and over can contribute an additional $7,500 as a catch-up contribution. - Over contributing to your 401(k) can lead to double taxation of the excess contributions. Ensure your company’s provider has the systems in place to avoid this. By taking the time to understand your financial situation and retirement goals, you can determine the right 401(k) contribution deferral amount for you. Remember, it is not just about contributing the maximum amount allowed, but about contributing an amount that aligns with your unique financial circumstances and goals. And of course, the earlier and more regularly you start contributing, the more time you give your money to grow through the power of compounding. ### Performance Not Guaranteed: Why Investing (like life events) Is Not Guaranteed Markets are unpredictable. Stocks and/or bonds may do well one year and bad in another. An economic event may occur. There are so many things that cannot be forecast. If you believe in innovation and the ability for businesses to grow, over the long term, investing in the markets can build you much greater savings than holding all your money in cash. **Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals. * Calculators: [Savings Calculator](https://www.sharebuilder401k.com/help/savings-calculator/) [401(k) Income Calculator ](https://www.sharebuilder401k.com/help/401k-income) This is not meant to be tax advice. ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.

403(b) vs 401(k)

# 403(b) vs 401(k): Which is the Best Retirement Plan for Your Non-Profit, Church, or School? Offering a retirement plan like a 401(k) or 403(b) is a key need for most non-profits, churches, and education institutions. These benefit packages provide tax advantages, support long-term financial wellness for your team, and can help attract and retain valuable employees. Most school, church, and non-profit retirement plans are defined contribution plans, where both employer and employee can contribute regularly to a retirement account — and understanding the differences between a 401(k) vs 403(b) can help you choose the right plan for your organization. Note that while schools, churches, and non-profits may choose which is best suited for their organization, the 403(b) is not an option for other businesses. ## What is a 401(k)? [A 401(k)](https://www.sharebuilder401k.com/overview/what-is-a-401k/) is the most common retirement plan for businesses and is also an option for non-profits, churches, and schools. These plans allow both employers and employees to contribute and save tax-deferred and/or after-tax with the Roth 401(k) feature. 401(k) plans are a popular retirement plan for businesses and employees because they offer flexibility, automatic payroll contributions, high contribution limits, and [tax benefits](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/). ### Key Features: - Employer and employee contributions through payroll deductions - Tax-deferred growth, with an option for [Roth (after-tax)](https://www.sharebuilder401k.com/blog/what-is-a-roth-401k/) contributions - Higher contribution limits than traditional IRAs - Access to a wide range of [investment options](https://www.sharebuilder401k.com/services-investments/etf-lineup/) - Must comply with ERISA Rules, which include [fiduciary responsibility](https://www.sharebuilder401k.com/blog/what-is-an-erisa-3-38-advisor/), annual reporting and [nondiscrimination testing](https://www.sharebuilder401k.com/blog/what-is-401k-plan-testing/) ## What is a 403(b)? A 403(b) was the original retirement plan designed for nonprofit organizations such as schools, churches, and 501(c)(3) charities. It functions similarly to a 401(k), with automatic payroll contributions, tax-deferred or Roth (after-tax) savings, and contribution limits set by the IRS. ### Key Features - Available to nonprofits such as schools, tax-exempt hospitals, religious groups, and charitable organizations - Employer and employee contributions through payroll deductions - Tax-deferred growth, with some plans offering a Roth option - Similar [contribution limits](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/) to 401(k)s - Investment options that typically include mutual funds and annuities - May be exempt from ERISA rules, reducing administrative requirements ## 401(k) vs 403(b): Key Differences The biggest difference between 401(k)s and 403(b)s is who can offer them to their employees. A 401(k) is available for private, for-profit businesses as well as non-profits, while a 403(b) is only available to nonprofit and tax-exempt organizations. ### Other Key Differences Include: Investment choices – 401(k) plans typically offer a broad selection of investments including exchange traded funds, mutual funds, model portfolios, target-date funds, and more. In contrast, 403(b) plans often limit investments to annuity contracts and a few mutual funds. Administrative requirements: 401(k) plans must follow ERISA rules, while many 403(b) plans – especially those for public schools and churches – may be exempt, which can make them easier to manage. However, adopting a Safe Harbor 401(k) design will ensure there are few/any additional administrative needs to meet ERISA rules. Special catch-up contribution provision: 403(b)s allow for additional catch-up contributions for employees who have 15 or more years of tenure, which is not available in 401(k)s until the employee is 50 years of age. ## 401(k) vs 403(b): Pros and Cons for Nonprofit Businesses ### 401(k) Pros: More investment choices: 401(k) plans often include ETFs, mutual funds, and target-date funds—lower-cost options compared to the annuities commonly found in 403(b) plans. They also offer broader exposure to a variety of asset classes, which may better align with employees’ investment goals. Note that annuities can be made available in a 401(k) but have been unpopular due to costs and the added complexity of annuity contracts. - Payroll: Easy integration with most payroll providers. - Higher contribution limits: Compared to traditional IRAs and other options. - Tax savings: Tax-deferred growth, with some plans offering a Roth option. - Eligibility for profit-sharing and/or employer nonelective contributions: Some plans allow for profit-sharing contributions and/or other nonelective contributions from the employer. ### 401(k) Cons: - More strict compliance rules due to ERISA. - No universal catch-up rule: However, catch-up contributions of $7,500 per year are available for those over 50 ($11,250 for those 60-63). ### 403(b) Pros: - Additional catch-up provision: Employees with 15+ years of service with a qualifying employer may be able to make extra catch-up contributions (up to $3,000/year, lifetime max of $15,000). - Less administrative requirements: Exempt from some ERISA regulations, which can simplify plan operation. - Similar to a 401(k), 403(b)s have higher contribution limits vs other retirement options. - Tax-deferred growth, with some plans offering a Roth option. ### 403(b) Cons: - Limited investment options: Most 403(b) plans primarily offer annuities or a narrow range of funds, which tend to have higher fees, and less flexibility compared to the broader, often lower-cost options available in 401(k) plans. While annuities can provide guaranteed income in retirement, their higher costs and rigid contracts make them less ideal for building retirement savings. - Annuities are contractual arrangements and can add complexity for participants and your organization if you switch providers. ## Which Retirement Plan Should Your Non-Profit Business Offer: 401(k) or 403(b)? If your organization is a nonprofit, choosing between a 401(k) and a 403(b) requires careful consideration of what matters most to your organization in determining the best fit. Here is a quick breakdown: __A 401(k) may be a better option when:__ - A broader range of investment options and asset categories is desired. - Lower-expense investment options: Lower expense funds historically have outperformed higher expense funds over time. Future returns of course cannot be guaranteed. - Features like employer matching, non-elective profit-sharing, or scalable plan design are important. - Seamless payroll integration and competitive employee benefits are a priority. - Potential for lower overall costs due to more competition in the 401(k) marketplace vs. 403(b)s. __A 403(b) is often a good fit when:__ - There is a preference for a simpler plan structure with fewer ERISA administrative requirements. - Limited investment options are acceptable, often focused on annuities and/or mutual funds. - There is no immediate need for additional features or investment options. Both 401(k) and 403(b) plans are excellent tools to help employees save for the future while offering valuable tax advantages. The best choice often depends on the level of flexibility or simplicity your organization needs, as well as the investment options that will best support your team’s retirement goals. For some, a straightforward 403(b) may be a solid fit. For others, a more customizable 401(k) offers greater growth potential and broader investment choices. Either way, providing a retirement plan is a meaningful step toward supporting your employees and strengthening your benefits package. ## Key Takeaways: 401(k) vs 403(b) Here is a quick recap of the most important points to keep in mind: - A 401(k) can be offered by both for-profit businesses and nonprofits. - A 403(b) is designed for nonprofits like schools, churches, and tax-exempt groups. - Both plans can offer tax-deferred or Roth options, automatic payroll contributions, and high annual contribution limits. - 401(k)s usually offer more investment flexibility with ETFs, mutual funds, and target-date funds that are not typical in 403(b)s. - 403(b) plans may have more limited investments, often focused on annuities and a small list of mutual funds. - Annuities are common in 403(b) plans. However, they often come with higher fees, which can limit growth, though they may offer more stable value compared to ETFs and mutual funds. - 403(b) plans may come with simpler administration and fewer compliance requirements. - 401(k)s must follow ERISA rules, including annual reporting and nondiscrimination testing. Safe Harbor design does automatically satisfy testing requirements. - Both plans allow employees age 50+ to make catch-up contributions. - 403(b) plans also offer a special provision for employees with 15+ years of service (allowing for additional contributions up to a lifetime maximum). - 401(k) plans may offer more room for customization and added features to meet your organization's needs. ## The Bottom Line: Both 401(k) and 403(b) plans offer powerful tools to support employee retirement savings, but the best option depends on the organization’s structure and goals. For nonprofits seeking a simpler, lower-maintenance option, a 403(b) may be a good fit. For organizations that are prioritizing greater flexibility, investment variety, lower investment expense, and additional features, a 401(k) may be a better solution. In either case, offering a retirement plan is more than a benefit – it is an investment in employees, their future, and the overall strength of the organization.

How to Choose the Best 401k Provider for Your Business

Whether you’re shopping for your company's first 401(k) or comparing your existing plan against other providers, there are some important items to consider to make sure you have the best plan for your business. Here are eight attributes that’ll help determine if you will receive (or are receiving) the right value and services from your 401(k) plan provider. 1. Low-cost, transparent pricing that automatically lowers business and participants costs as the plan money grows – no contracts or contribution minimums required. Some providers will provide you pricing but won’t revisit unless you’re pushing for it. 2. Easy, online setup process (something you could even do over lunch), and the plan is supported on-going to help manage payroll and simplify year-end requirements. You may be surprised how many providers are still paper based to setup and require a bit of back and forth to get your plan up and running. 3. Keeps all-in participant [expenses below 1%](https://www.sharebuilder401k.com/why/index-fund-advantage "Index Fund Advantage") (inclusive of fund expenses, recordkeeping, and custodial services), so more of your money stays invested in the markets. Often, small businesses just starting a plan are subject to fund options with expense ratios over 1%. 4. Takes a long-term, diversified, and preferably an index-based fund approach for the investment line-up. Index funds typically have lower expenses than actively managed funds, and historically* have been tough to beat. Index fund expense ratios are typically under 0.50% and many [major ones are under 0.10%](https://www.sharebuilder401k.com/services-investments/etf-lineup "Fund Line-up and Expense Ratios"). 5. Provides a governing [Investment Committee](https://www.sharebuilder401k.com/services-investments/investment-philosophy "Investment Committee ERISA 3(38) Services") that manages your investment roster and model portfolios. This brings expertise and deep analysis to the process, saves you time and energy, and protects the employer and plan sponsors from investment fiduciary risks. This is called an ERISA 3(38) advisor. 6. Provides robust employee retirement and investment guidance tools, materials, training and support to answer employee questions quickly and help them get on track to reach their goals. 7. Offers flexible features to employees, such as the ability to request a loan from the plan or make Roth contributions, as well as a [high level of service](https://www.sharebuilder401k.com/services-investments/overview "Exceptional Service Every Step of the Way") including a care center that picks up the phone to assist (not to some voice mail during business hours). 8. Fits your current business needs and has options that can grow as your company evolves. Whether you need an Individual 401(k), a plan that vests over time for your employees, or want to consider advanced profit sharing options, you’ll want to ensure your provider can meet your needs today and tomorrow. These considerations will help ensure you have a low-cost, high service plan that serves both you and your employees now and in the future. *Historical performance is no guarantee of future result. The investment return and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. You should carefully consider information contained in a fund's [prospectus](https://www.sharebuilder401k.com/services-investments/fund-prospectus/ "Fund Prospectus"), including investment objectives, risks, charges and expenses. Please read the prospectus carefully before investing.

Benefits of Compounding

Who hasn’t heard or joked about some present that keeps on giving? A little fun fact, the popular phrase the “gift that keeps on giving” was originally associated with Victor Radio’s in the 1920s, later RCA TVs, and many others have used variations of it over time. It is now a popular parody phrase too. What really is a gift that can keep on giving? This of course depends on what you value and care about. Then, is it even possible for something to keep giving? When it comes to money – something that is useful and valued by most people – there really is something that has historically helped grow people’s money over time. __Compounding Could Really Be Your Magical Gift__ In the financial world, there is this fantastic thing called compounding. When you put money into stocks, bonds, or cash, they earn dividends and/or interest, and investments like stocks and bonds can also achieve price or market growth too. Over time your money can grow in an exciting way. This is called compounding, or compounded returns. Consider this, a $1,000 invested one-time over 40-years that achieves a return of 8% each year will turn into over $20,000.* That’s right, over $19,000 of the greater than $20,000 dollars in savings is generated from compounding! __Your 401(k) Can Make It Easier to Build the Giving Gift__ Now think about if you put a steady amount or percent of your salary each paycheck into your 401(k) for 30 or 40 years. How much might this build to? While there are no guarantees, historically speaking, you’ll likely be more than a millionaire.* Yes, a person earning $50,000 per year every year for 40-years that puts in 7% of salary (puts in $3,600 each year for 40 years), will be a millionaire assuming an 8% return each year. So how does it make it easier? Your 401(k) does three main things to help: 1. Pulls from your salary automatically to put saving on autopilot. Many people struggle to save regularly unless it is done automatically and put in a place not easily accessible. 401(k)s do just that. 2. Your money grows without taxes on dividends or interest in your 401(k) plan. So, there is no tax drag over the years it stays invested in your 401(k) to help your money build. You will be taxed on the money you withdraw in retirement at your tax rate at that future time. 3. Often employers provide a match so that when you contribute to your 401(k), your employer will add to your retirement savings too. That’s free money! Let’s say your employer matches 3% if you put in 6% of salary. If you put in 6%, just like that you are contributing 9% for your future self. Einstein is credited with saying, "The most powerful force in the universe is compound interest." Whether he said it not, when it comes to our financial lives, it rings true. Happy saving. **Examples cited are hypothetical and compare how a one-time investment of $1,000 or investing $3,600 each year for 40 years can grow over time assuming an 8.0% fixed annual rate of return. Your account may earn more or less. This is a hypothetical example only, and not a guarantee of future returns. Actual experience will vary with portfolio selections and changing market conditions. The total account balance does not take into account federal and state income taxes, which will be due upon withdrawal. Assets withdrawn before 59½ may incur a 10% tax penalty.* __Side Note on Investment Returns__ In the compounding example, we illustrate the impact of 8% annual returns over 40 years. Is 8% annual returns really doable? We don’t know. We do know that between 1926-2018 that a portfolio built with 60% stock funds and 40% bonds delivered 8.27% annually during this period (50% invested in large company stocks, 10% small company stocks, 35% long-term government bonds, and 5% U.S. Treasuries). During this time period, small stocks delivered 11.8% annually, large stocks 10%, LT Gov Bonds 5.5% and U.S. Treasuries 3.3%. These past returns of course do not guarantee how these asset classes will perform in the future. Each year and time period will be different so you can expect your portfolio to deliver a different percentage over time based on how you invest, how long you invest, and market fluctuations.

How Much Money Do You Need to Retire?

## How Much Should You Have in Your Retirement Savings? Planning for retirement can feel overwhelming, but having clear savings goals at different life stages can make the process more manageable. In this guide, we’ll break down retirement savings benchmarks, explore the power of compounding, and share practical strategies to maximize your 401(k) contributions. By understanding these key concepts, you can stay on track to meet your financial goals and enjoy a comfortable retirement. ## How Much Should You Save for Retirement at Different Ages? Use this [retirement savings calculator ](https://www.sharebuilder401k.com/help/savings-calculator/)to estimate your needs and determine how much you should be saving based on your specific financial goals. A financially secure retirement starts with saving strategically over time. By age 67, financial experts suggest having 10 times your annual salary saved. Here’s a breakdown of recommended savings milestones: - Age 30: 1x your salary - Age 40: 3x your salary - Age 50: 6x your salary - Age 60: 8x your salary - Age 67: 10x your salary These benchmarks serve as a guideline to evaluate your progress. If you're behind, don’t worry—there are ways to catch up, such as increasing contributions, cutting expenses, and utilizing tax-advantaged accounts. Keep in mind that individual needs vary based on factors like healthcare costs, lifestyle choices, and inflation. ## How Much Money Do You Need to Retire? The amount you need for retirement depends on your lifestyle, expenses, and longevity. A commonly used rule of thumb is the 4% rule, which suggests withdrawing 4% of your total savings annually to cover living expenses while ensuring your money lasts. Here’s how much you would need based on expected yearly spending: - $40,000 per year → $1 million in savings - $60,000 per year → $1.5 million in savings - $80,000 per year → $2 million in savings - $100,000 per year → $2.5 million in savings Other factors, such as inflation, healthcare costs, and Social Security benefits, can impact your total needs. Some retirees may require more or less depending on pension income, real estate holdings, or other financial resources. ## How to Reach Your Retirement Savings Goals If you’re not where you need to be with your retirement savings, there are actionable steps you can take to get back on track: - Start saving early: The earlier you begin contributing to retirement accounts, the more time your money has to grow through compounding. - Increase contributions over time: Whenever you receive a raise or bonus, increase your savings rate to accelerate your progress. - Take advantage of employer matches: If your company offers a 401(k) match, contribute enough to receive the full match—it’s essentially free money. - Diversify your investments: A balanced portfolio of stocks, bonds, and other assets can help maximize returns while managing risk. - Minimize fees: High investment fees can reduce your overall returns, so choose low-cost funds when possible. - Utilize tax-advantaged accounts: IRAs, 401(k)s, and HSAs offer tax benefits that can significantly boost your savings. - Consider delaying retirement: Working longer can allow you to save more and delay withdrawals, giving your investments more time to grow. By following these steps, you can improve your chances of reaching your retirement savings goals and securing a comfortable future. ## What is the Power of Compounding and How Does it Work? Compounding is one of the most powerful tools for growing your retirement savings. It occurs when your earnings generate additional earnings over time. The earlier you start saving, the more compounding can work in your favor through: - Interest and dividends reinvested automatically - Capital appreciation as investments grow in value - Exponential growth as earnings continue to generate more earnings For example, if you invest $10,000 per year into your 401(k) with an annual return of 7%, after 20 years, your investment would grow to nearly $410,000—even though you only contributed $200,000. If you continue saving for 40 years, that amount would exceed $2 million thanks to compounding. Starting early is ideal, but even if you're behind, increasing contributions and staying invested can still lead to significant growth. ![Power of Compounding](//images.ctfassets.net/wsuay9fbp17w/61KVKfFqW63McTKXzW3Yer/0a6d0a94eb76ad0fd59b1c974aa1e4f6/Compounding.png) ## How Can You Increase Your 401(k) Savings? - Maximizing your 401(k) contributions is essential for a strong retirement. Here are some practical strategies: - Contribute at least 10-15% of your salary (including employer match). If you can’t start at this level, gradually increase contributions over time. - Boost contributions by 1-2% annually: Increasing savings with each raise helps grow your retirement fund without major lifestyle adjustments. - Rebalance your portfolio regularly: Ensure your investments align with your goals and risk tolerance. - Choose low-cost funds: Lower fees mean more of your money stays invested. Explore low-cost ETF options here - Consider Roth 401(k) contributions: Tax-free withdrawals in retirement can be beneficial if you expect higher future tax rates. - Take advantage of catch-up contributions: If you’re over 50, an additional $7,500 per year. Learn more about how much you can contribute here: https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/ If you have multiple retirement accounts, consolidating them may help streamline management and reduce fees. Automated contributions and employer-provided financial planning tools can also keep your savings on track. ## Other Ways to Strengthen Your Retirement Plan Beyond your 401(k), consider these additional strategies to build long-term financial security: - Open an IRA: Traditional and Roth IRAs provide additional tax benefits. - Build an emergency fund: Keeping 3-6 months of expenses in savings can prevent the need for early retirement withdrawals. - Pay down high-interest debt: Eliminating costly debt can free up more money for savings. - Delay Social Security benefits: Waiting until age 70 to claim Social Security can result in significantly higher monthly payouts. - Invest in a Health Savings Account (HSA): If eligible, HSAs provide tax-free growth for medical expenses in retirement. A diversified and well-planned financial strategy will help ensure long-term security and peace of mind. ## Key Takeaways 1. Follow age-based savings benchmarks: By 30, save 1x your salary; by 40, 3x; by 50, 6x; by 60, 8x; and by retirement, 10x. 2. Understand how much you need to retire: The 4% rule helps estimate savings based on expected annual expenses. 3. Start early to take advantage of compounding: Even small contributions can grow significantly over time. 4. Maximize your 401(k) contributions: Aim for 10-15% of your salary, increase contributions with raises, and optimize investments. 5. Utilize additional savings strategies: Consider IRAs, HSAs, and debt reduction techniques. 6. Review and adjust your plan regularly: Monitor savings progress, rebalance your portfolio, and make necessary adjustments. By considering these strategies, you may be better positioned to manage your financial future and prepare for retirement. Starting your planning today can help support your long-term financial goals.

The Straight Scoop on Savings and 401k Plans

Greetings and welcome! At ShareBuilder 401k, we have the great honor of serving thousands of businesses with 401(k) plans and helping tens of thousands of employees save for retirement. Our mission is to Lead Americans to Save. Complexity, number of products, lack of transparency, other financial concerns and education can all get in our way. For all these reasons, we are introducing this blog to give you straightforward perspective on all the ins and outs of retirement plans, saving, and financial know how. Whether its learning about saving products, 401(k) plans, understanding (fair) costs, investing, funds, markets, or financial planning, we’re here to help provide you with a clear understanding on these topics, what matters and how to address it. If you’d like to learn more about our background, [click here.](https://www.sharebuilder401k.com/why/about-sharebuilder-401k) Here’s to your success!

Automatic Investing: How It Helps Build Your Retirement

## Why Automatic Investing is a Good Idea for Your Retirement Plan When it comes to saving for retirement, not all Americans prioritize doing so. In fact, 57% of Americans felt that they were behind on their retirement savings,¹ and a recent survey in 2024 showed that 16% of workers were contributing less than the year prior, and 21% contributed nothing at all in 2023¹. Whether you find yourself in a similar situation or not, ensuring you are set up with automatic investing in your retirement plan is an essential building block of having a meaningful nest egg when you reach retirement. ### What is Automatic Investing? As the name suggests, automatic investing means that a set amount of money is being transferred from your account into your retirement account on a regular basis. Typically, when you enroll in your company’s 401(k) plan, you set up a percentage of your salary to be pulled each paycheck and contributed to your 401(k) account. This is automatic investing! However, if you don’t have access to company retirement plan benefits or have a Solo 401(k) plan, you will need to establish an auto-ACH with your bank account to make your contributions automatic. This is typically set up for once a month, bi-weekly or even weekly contributions depending on your preference and you can always adjust the percentage or amount you are contributing. Make sure to keep track of the [contribution limits](https://www.sharebuilder401k.com/blog/2025-401-k-max-contribution-limits/ "401(k) Max Contribution Limits") each year so you don’t exceed them. Many 401(k) plans have guardrails that help you manage this. ### Why It’s Worth Enabling Automatic Investing If you want to ensure that you are building for your future self, automatic investing is likely the easiest and potentially most powerful way possible to build wealth. It doesn’t require you to remember to invest each month or be tempted to spend the money you’d planned to put away on something else. It makes budgeting for retirement one of the simplest things you can do. Thanks to the [power of compounding](https://www.sharebuilder401k.com/blog/what-is-compounding-and-how-it-helps-your-money-grow/ "Power of Compounding"), steady contributions can add up significantly and you’ll end up with a sizable amount saved for retirement. Not only can you make your retirement contributions a habit, but automatic contributions allow you to stay on top of contribution deadlines. For 401(k)s and IRAs, there are deadlines at the end of the year and during tax season that may restrict the amount you can contribute to your plan as an employer (if you sponsor a retirement plan) and as an employee. If you haven’t been regularly contributing to your plan throughout the year, these deadlines may sneak up on you, and you may miss out on the chance to maximize your contribution and potentially [save on taxes](https://www.sharebuilder401k.com/blog/how-a-401-k-can-help-you-save-on-taxes/ "How a 401(k) Can Help You Save on Taxes") for that year. ### Dollar Cost Averaging vs Lump Sum Investing If you are automatically contributing a portion of your income to your retirement plan every month, you're inherently practicing dollar cost averaging, which is the act of investing smaller amounts over time rather than making a single large investment, known as lump sum investing. By investing smaller amounts periodically over time, you are minimizing the risk you may take on by investing a large sum of money all at once. For long-term investors, dollar cost averaging smooths the ups and downs of a volatile economy. When markets drop, your money will buy more shares, and when markets rise, you are buying fewer shares. If the market starts to underperform, it is not as much of a shock to see your accumulated investment decline by 10 percent than it would be to see a large sum of money decline in a short period of time. This example shows how it can work: | **Period** | **Amount Contributed** | **Fund Share Price** | **Shares Purchased** | | ------------ | :----------: | :----------: | :----------: | | 1 (market high) | $500 | $100 | 5 | | 2 (market low) | $500 | $50 | 10 | | 3 (recovering market) | $500 | $75 | 6.67 | | Totals | $1,500 | $75 average | 21.67 | | Value | $1,625.25 | 21.67 shares x $75 | | Lump sum investing, on the other hand, allows you to take advantage of time in the market but contributing a larger amount all at once. Instead of your contributions being spaced out over a period of time, the lump sum investment puts your money to work immediately, so it is in the market longer than funds allocated to dollar-cost averaging. There are some issues to point out when it comes to lump sum investing, however. First, most people don’t have the annual amount they would put into their retirement account readily available to invest all at once. Contributing a portion out of each paycheck is much easier. Second, lump sum investing puts you at more risk of timing the market issues and no one is good at this (requires luck). If you buy when markets are high, it could take a long time to get a good return. If you buy at a low, congratulations, you are ahead of the game. Just know that it’s a much riskier approach to do infrequent lump sum investments when building for retirement. If you are in the situation to do some lump sum investing, it can be a smart strategy to automatically invest in your 401(k) or IRA, and make a lump sum contribution once or twice a year in a retail account to top off your retirement funds and help maximize your savings within your budget. ### Pay Yourself First At the end of the day, your retirement plan is one of the most important assets to invest in. Once you hit your retirement age, a well-funded nest egg will provide financial security and likely some peace of mind. This is why we advocate for [“paying yourself first”](https://www.sharebuilder401k.com/blog/pay-yourself-first/ "Pay Yourself First") or prioritizing saving over any other financial goals or needs. Automatic investing can help do just that. Experts recommend contributing [10-15% of your income](https://www.sharebuilder401k.com/blog/how-much-to-save-for-retirement/ "How Much to Save for Retirement") to your retirement plan. If that’s not feasible right away, you can start smaller and incrementally increase your contributions by 1% each year. Not only will your assets grow over time, but you can opt to have your contributions made tax-deferred, so your taxes are lowered now, and the money isn’t taxed until it is withdrawn in retirement. You could also contribute some or all to a Roth 401(k) or Roth IRA and pay the taxes now, so you don’t have to worry about them when you reach retirement age. Depending on how your 401(k) is set up, you have the flexibility to do either or both, so allocate your 401(k) contributions depending on your needs.* So, consider setting up automatic contributions for your 401(k) or IRA accounts. Before you know it, you’ll have amassed a nice nest egg for retirement without even thinking about the account withdrawals. And better yet, your future self will thank you. ## Key Takeaways 1. Automatic investing allows you to automatically contribute a portion of your income to a retirement plan on a regular basis. 2. Most company 401(k) plans enable you to make automatic contributions with each payroll to your account. If you set up an IRA or Solo 401(k), you will need to set up an auto-ACH on the frequency you choose. 3. Dollar cost averaging is the act of investing regular amounts over time. By contributing to your retirement plan on an automatic basis, you are taking advantage of dollar cost averaging. When markets drop, your money will buy more shares, and when markets rise, you are buying fewer shares. Markets do not need to fully recover for you to achieve positive returns. 4. Lump sum contributions are one time or infrequent investments. These can be inherently riskier as more is left to market timing which often requires luck to get better than average returns. Performing both lump sum investing and dollar cost averaging can potentially be a good strategy to help you maximize your savings within your budget. 5. Experts recommend contributing 10-15% of your income to your retirement plan, but you can start smaller and increase your annual contribution by 1% each year. If you are enrolled in your company 401(k), see what your current salary deferral level is and adjust as you are able to stay on track. 6. Your automatic contributions can be made tax-deferred, so you can potentially lower your taxable income in the current tax year and then manage taxes later when you withdraw your funds in retirement. You can also make Roth contributions and pay taxes now so you can withdraw them tax-free. Many 401(k) plans enable you to contribute some tax-deferred and some Roth (or after tax) if you choose. _{¹Source: Bankrate Retirement Savings Survey, August 19-21, 2024} _{*Assets withdrawn before age 59½ may incur a 10% tax penalty.}

How to Become a 401(k) Millionaire

Becoming a millionaire might seem like a far-fetched dream, but with the right financial strategies, it is entirely possible for most Americans. So how do you go from saving a little bit each month to joining the ranks of 401(k) millionaires? The answer lies in taking advantage of retirement savings plans and making strategic financial decisions over time. This blog will explore the key questions around becoming a 401(k) millionaire and how you can achieve financial freedom and wealth through consistent, steady planning. ## How can you become a 401(k) millionaire? To become a 401(k) millionaire, start by contributing consistently to your retirement savings plan. Contribute 10-15% of your income annually, take advantage of employer matches, and let compound interest work for you over time. Investing consistently over a 30-40 year career can lead you to reach millionaire status by the time you retire. It’s not about winning the lottery or receiving a big windfall; it’s a process of steady, disciplined saving and investment. And the best part? It’s a process that’s open to most working Americans. ## An Example on the Magical Power of Compounding Imagine Anne contributes $10,000 per year to her 401(k), which is approximately $833 per month. Her employer matches $4,000 annually, equating to $333 per month. Assuming an 8% return on her investments each year, Anne will have accumulated nearly $700,000 in 20 years from a total contribution of $280,000 ($200,000 from her and $80,000 from her employer). That's well more than double the amount she put in. The benefits of compounding grow exponentially over more extended periods. If Anne continues her contributions for 40 years, she will accumulate over $4,000,000 from a total contribution of $560,000 ($400,000 from her and $160,000 from her employer). This substantial nest egg allows Anne to retire comfortably and pursue her dreams and passions. The key takeaway? Contribute regularly to your 401(k) and harness the power of compounding. See example below: ![Compounding Chart](//images.ctfassets.net/wsuay9fbp17w/3MiBxFjevpGVqln8hcL606/6eb380493d9ac304ede5e1ba939b4926/MicrosoftTeams-image__13_.png) ## Why is contributing to a 401(k) plan crucial for building wealth? Contributing to a 401(k) is crucial because it's one of the most effective ways to build wealth over time. Around 90% of millionaires contribute to their retirement accounts, and doing so allows you to benefit from employer contributions, tax advantages, and compound growth over time. A 401(k) plan is designed for long-term savings, and as your contributions grow and earn returns, your account balance can increase substantially over several decades. Making regular contributions and allowing the funds to grow uninterrupted is key to long-term wealth accumulation. ## What other factors contribute to becoming a millionaire? Besides contributing to a 401(k) plan, purchasing a home is another common strategy for building wealth. Around 87% of millionaires have bought a home, which can appreciate in value over time and contribute to their overall wealth. Homeownership not only provides a stable asset but also acts as a forced savings plan, as you build equity with each mortgage payment. Combining the growth of your 401(k) and the equity in your home can set you on a solid path to financial independence. ## How does the middle class build wealth? The middle class builds wealth primarily through steady saving and investing in retirement accounts and homeownership. According to a Federal Reserve report from 2023, the median American family saw a 37% increase in wealth, outpacing even the top one percent. Families earning $150,000 to $250,000 per year are consistently contributing to retirement plans and buying homes, growing their wealth significantly over time. The story of wealth-building in America is not just about the super-rich; it's about ordinary families making disciplined financial decisions and seeing significant gains over the long term. ## What steps can you take to become a 401(k) millionaire? 1. Start Early and Contribute Consistently: Begin contributing to your 401(k) as early as possible, and aim to save 10-15% of your salary each year. The earlier you start, the more time your money has to grow. 2. Maximize Employer Matches: Take full advantage of any employer match available in your 401(k) plan. This is essentially "free money" added to your retirement savings. 3. Invest Wisely and Stay the Course: Choose a diversified investment strategy that aligns with your risk tolerance and retirement goals. Stay invested through market ups and downs to let your assets grow over time. 4. Plan for Homeownership: Purchasing a home can be a key factor in building wealth. Not only does it provide a place to live, but as your mortgage gets paid down and property values increase, your net worth grows. 5. Stay Educated and Informed: Continue learning about financial planning, retirement savings, and investment strategies. Make use of educational materials and resources available through your 401(k) plan provider to make informed decisions. ## Key Takeaways 1. Consistent 401(k) Contributions: The most reliable path to becoming a millionaire is to contribute consistently to your 401(k) plan. Over a career of 30-40 years, these contributions can compound and grow significantly. 2. Maximize Employer Contributions: Take advantage of any matching contributions from your employer. Contributing at least enough to get the full match can significantly increase your retirement savings over time. 3. Invest Wisely and Stay Invested: Choose a diversified investment approach in your 401(k) and stick to it, letting your money grow over the long term. 4. Homeownership as a Wealth Builder: Buying and maintaining a home can help build equity and grow your net worth over time, providing another avenue for wealth accumulation. 5. Middle-Class Wealth Building: Most millionaire families are not part of the top one percent; they are middle-class or upper-middle-class families who have saved consistently, invested wisely, and benefited from rising property values. Becoming a 401(k) millionaire isn't a quick process, but it's a proven way to build wealth for your retirement. Remember that you don't have to be earning six figures to achieve financial freedom. By making smart decisions with your 401(k), taking advantage of employer matches, and investing in a home, you can join the ranks of those who have achieved the financial security they desire. For more insights on building your retirement savings and making the most of your 401(k), explore the educational resources provided by your 401(k) plan provider and check out the latest financial news and reports, including the Federal Reserve’s findings on American wealth growth. Start your journey to becoming a 401(k) millionaire today by making small, consistent contributions and planning for your future. Your financial security depends on the steps you take now to secure a stable and prosperous retirement.

How a 401(k) Can Help You Save on Taxes?

# How a 401(k) Can Help You Save on Taxes If you're looking to secure your financial future and reduce your tax burden, a 401(k) plan can be a powerful tool in your arsenal. With high contribution limits, tax credits, and tax-deductible expenses, a 401(k) plan can provide rich benefits for both the business owner and their employees. In fact, with these tax benefits and the introduction of low-cost providers, 401(k) plans are becoming much more popular for every size business, including the self-employed. ## The Basics of a 401(k) Plan Before we dive into the tax-saving aspects, let's briefly review what a 401(k) plan is. A 401(k) is a tax-advantaged retirement savings account offered by employers to their employees. It allows you to contribute a portion of your income pre-tax or after tax via the Roth 401(k) feature to your retirement fund. The funds in your 401(k) can then be invested in a variety of assets such as stocks, bonds, and cash typically with ETFs and/or mutual funds, enabling your money to grow over time. Now, let's explore how a 401(k) can help you save on taxes: ## 5 ways a 401(k) can help you save on taxes: 1. __Defer up to $69,000 from 2024 Taxes:__ Go ahead and up that number to $76,500 if you’re at least 50 years old. As an employee of your company, you may contribute up to $23,000 to the plan from your salary ($30,500 if age 50 or more), and you can also receive any matching and/or profit-sharing [contributions](https://www.sharebuilder401k.com/blog/what-is-a-401k-contribution-limit/) that you provide to the plan up to the limits. This tax savings alone may cover all of the plan costs for some small firms from a small business owners perspective. 2. __Receive up to $16,500 in tax credits:__ Businesses with at least one employee (in addition to the owner) and up to 100 employees, [qualify for an annual tax credit](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k/) of up to $5,000 to offset 100% of plan administrative costs. For those with less than 51 employees (half of the administrative costs for those with 51-100 employees) for the first three years – that’s a potential cumulative savings of $15,000 over three years. Administrative costs will vary by the number of employees that participate in your plan. For a business with 10 employees just starting their first retirement plan, expect to pay about $1,200 a year. Subtract the credit that covers 100%, and that’s a pretty low-cost plan to administer at $0 per year. In addition, if you choose the automatic enrollment feature with auto-escalation, you qualify for another $500 per year for the first three years. 3. __Hedge future taxes with a Roth 401(k):__ A [Roth 401(k)](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/) enables small business owners and employees to make after-tax contributions with no income level restrictions – unlike the Roth IRA which has income limits. This means that employees that use the Roth 401(k) option will have the advantage of tax-free withdrawals – earnings and all – when they use these funds in retirement. Owners and employees can choose to put all, part, or none of their personal contributions into their Roth. 4. __If you choose to match, there are tax credits available and they’re tax deductible too:__ Employer contributions are optional in 401(k) plans. But choosing not to match can limit how much highly compensated employees (including owners) can put into their 401(k) account. The good thing is that by providing a relatively small match to eligible employees (employees earning less than $100k a year), you can maximize your own contributions. Plus, if you have less than 100 employees, you can qualify for tax credits [tax credits](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/#:~:text=A%20Terrific%20Match%3A%20Employer%20Contributions%20Are%20Eligible%20for%20Tax%20Credits%20and%20Tax%20Deductions/) of up to $1,000 per employee for your first 50 employees for your employer contributions. It keeps getting better. Employer contributions are often a 100% tax-deductible expense too for your business for amounts not covered by the tax credits. 6. __401(k) profit-sharing can help manage business taxes:__ [Profit-sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/) is discretionary for your business. You can provide one in good years and cut it out in tougher times. The amount of profits you share will lower your business earnings, so there will be less for the IRS to take. That's not the only good news: the profit share will increase your 401(k) account savings, and since it’s a tax-deferred contribution, there are no personal tax consequences until withdrawals are made. You and your tax advisor can run the numbers each year and determine what amount is best for your organization. ## Do You Pay Taxes on 401(k) Contributions? One of the fundamental questions surrounding 401(k) plans is whether you pay taxes on your contributions. The answer depends on whether you opt for pre-tax or post-tax (Roth) contributions. ## Pre-tax 401(k) Contributions 1. Pre-tax contributions are made before your income is subject to taxation. This means that the amount you contribute to your 401(k) is deducted from your taxable income, reducing the income you report on your annual tax return for the current year. As a result, you pay less in income taxes in the year you make the contribution. However, it's important to note that you will pay taxes on your withdrawals during retirement. 2. Immediate tax benefits: Reduce your taxable income in the year of contribution. 3. Lower current tax liability: Enjoy potential tax savings in the present. 4. Tax-deferred growth: Investment gains within the account are tax-deferred until withdrawal. 5. Taxation in retirement: Pay taxes on withdrawals during retirement, including both contributions and investment gains. ## Post-tax 401(k) Contributions (Roth 401(k)) 1. In contrast, post-tax contributions, often referred to as Roth 401(k) contributions, are made after your income has been taxed. This means you won't receive an immediate tax break in the current year when you contribute to your Roth 401(k). 2. Tax-free withdrawals in retirement: Enjoy tax-free access to both contributions and investment gains during retirement. 3. No immediate tax deductions: Contributions are made with after-tax dollars, providing no immediate tax break. 4. Greater tax diversification: Combining post-tax Roth contributions with pre-tax contributions can offer tax flexibility in retirement. 5. Ideal for long-term tax planning: Roth 401(k) contributions are well-suited for those who anticipate being in a higher tax bracket during retirement. ## Is 401(k) Pre-tax or Post-tax for You? Determining whether pre-tax or post-tax 401(k) contributions are right for you depends on your unique financial situation and long-term goals. Here are some considerations to help you decide: - __Current tax bracket:__ Evaluate your current income tax bracket. Pre-tax contributions are more beneficial if you are in a higher bracket, as they provide immediate tax savings. - __Future tax bracket:__ Consider your expected tax bracket during retirement. If you anticipate being in a higher tax bracket in retirement, Roth contributions may be more advantageous. - __Tax diversification:__ Some individuals choose a combination of both pre-tax and post-tax contributions to create tax diversification, giving them flexibility in retirement. - __Long-term planning:__ Assess your long-term financial goals and retirement plans. Your choice between pre-tax and post-tax contributions should align with your retirement strategy. ## 401(k) Tax Benefits 401(k) plans offer several tax benefits, making them an attractive option for retirement savings: - __Pre-tax contributions:__ Reduce your current taxable income, potentially leading to lower income tax liability. - __Tax-deferred growth:__ Any investment gains within your 401(k) account are not taxed until you withdraw the funds during retirement. - __Post-tax Roth 401(k) contributions:__ Provide tax-free withdrawals in retirement, allowing you to access both your contributions and investment gains without paying any federal income tax. ## 401(k) Profit-Sharing In addition to your own contributions, some employers offer profit-sharing contributions to employees' 401(k) accounts. Profit-sharing is an enticing incentive for employees to save for retirement, as it effectively boosts their retirement savings without requiring additional contributions from their own pockets. Again, profit-sharing technically lowers your overall business earnings, which means they are tax deductible. ## Tax-Advantaged Investments While 401(k) contributions are not entirely tax-free, they offer significant tax advantages that can help you grow your retirement savings more efficiently than taxable investment accounts. Know that dividends and capital gains aren’t taxed in your 401(k) account until withdrawn. Pre-tax contributions and earnings are only taxed on withdrawal; and Roth contributions and earnings aren’t taxed again when withdrawn in retirement. The tax-deferred growth within a 401(k) can have a substantial impact on your retirement nest egg. ## Roth 401(k) vs. Traditional 401(k) In summary, the choice between Roth 401(k) and traditional 401(k) contributions involves weighing immediate tax benefits against tax-free withdrawals in retirement. Both options have their merits and can be valuable for different individuals depending on their financial circumstances and goals. ## Starting a 401(k) can help you for the 2024 tax year: To ensure maximum tax benefits in the year ahead, it pays to get started sooner than later. Talk to your tax advisor and see how a small investment in a 401(k) can pay big dividends now as well as later when you decide it’s time to retire. ## How Much Should I Contribute to My 401(k)? Many financial advisors suggest [saving 10-15%* ](https://www.sharebuilder401k.com/blog/how-much-to-save-for-retirement/)of your income over your career for a comfortable retirement. This can be easier if your company’s 401(k) plan offers an employer match as that counts towards this savings percentage too. Plus, a 401(k) match is essentially free money. If you start saving mid-life or later, you may need to save more than 15% of your income to try and catch-up. Regardless of where you are, you can build meaningful retirement savings by assessing where you are and knowing the products, features, and retirement contribution limits as well as understanding some key concepts such as the [power of compounding.](https://www.sharebuilder401k.com/blog/what-is-compounding-and-how-it-helps-your-money-grow/) ## Key Takeaways: - 401(k) plans offer various tax benefits through pre-tax and post-tax (Roth) contributions. - Pre-tax contributions reduce your current taxable income and are tax-deductible. - Post-tax contributions provide tax-free withdrawals in retirement, including both contributions and investment gains. - Some employers offer profit-sharing contributions, enhancing employees' retirement savings. - The decision between pre-tax and post-tax (Roth) contributions depends on your tax situation, retirement goals, and long-term financial strategy. In conclusion, understanding the tax implications of your 401(k) contributions is essential for optimizing your retirement savings strategy. Consult with a financial advisor or tax professional to make informed decisions about your retirement planning. Your 401(k) can be a powerful tool for saving on taxes and securing a financially comfortable retirement. *This material is intended only as general information for your convenience and should not in any way be construed as investment or tax advice by ShareBuilder 401k. The owner/participant should consult with their tax advisor regarding any specific tax strategies. *

Solo 401k Plan 2019 IRS Tax Deadlines | ShareBuilder 401k

As a result of the COVID-19 pandemic, the IRS made some big changes that affect this year’s taxes. Most notably, they pushed back the filing and payment due date for most people and businesses to July 15, 2020. __What Does This Mean For Solo 401(k) Owners?__ It means you now have more time to lower your 2019 taxes by contributing up to $56,000 to your Solo 401(k) plan. Of course, you have options of how much you may want to contribute, if any, as you manage through what are uncertain times for many of us. If your business has solid cash savings and you’re going to owe taxes and/or have a need to build your nest egg, now is a good time to determine how much you want to contribute before the extended tax deadlines. As long as your plan was installed prior to January 1st of 2020, you now have up until July 15 to make 2019 contributions (October if you have a filing extension). __What Are the Solo 401(k) Employer Contribution Rules?__ Since you’re both an employer and employee when it comes to your Solo 401(k) plan, a smart move is to determine your tax situation and then make a one-time, employer contribution that best balances your tax saving needs with your retirement savings goals before the filing deadline. If your business is structured as a corporation, you can make employer contributions up to 25% of net earnings into the 401(k) plan. If you’re a sole proprietor or own an LLC (or partnership), this percentage changes to 20% of your net schedule C. Just keep in mind that total contributions as an employer and employee cannot exceed a combined total of $56,000 for the 2019 tax year ($62,000 if you’re over 50 years of age and you made an employee “catch-up” contribution). Note that employee contributions must be elected prior to the calendar year end, unlike your employer contributions. For the 2020 tax year, [401(k) contribution limits](https://www.sharebuilder401k.com/blog/2020-401-k-contribution-and-tax-deferral-limits-set-to-increase "Tax Year 2020 401(k) Contribution Limits Increased") have increased. __Here's an Example of How to Lower Your 2019 Taxes by $6,000 or More__ The amount you can tax defer will vary by your earnings and your tax rate. Here’s a hypothetical example of how an owner who makes an employer contributions of $30,000 will lower taxes by $6,000, assuming an effective tax rate of 20%, versus a person that doesn’t contribute: ##### Example Calculation and Comparison | | With a 401(k) Contribution | Without a 401(k) Contribution | | ------------ | :----------: | :----------: | | Earnings| $150,000 | $150,000 | | 20% of Net Self-Employment Contribution| $30,000 | $0 | | Taxable Income| $120,000 | $150,000 | | **Taxes Owed (20% Effective Tax Rate)**| **$24,000** | **$30,000** | Again, the owner that contributed paid $6,000 less in taxes. In actuality, the tax savings could be even greater as the 401(k) contribution may also drop the owner a tax bracket and/or lower the effective tax rate. Remember, this is an example and not meant as tax advice. Be sure to consult a tax advisor to discuss your specific situation and verify your tax deadline. Be well.

Learn How a 401k Can Help Your Business

This three-minute video provides highlights how a 401(k) can help you and your business from savings, loans, and tax credits and deductions to how your plan can be easy to run with ShareBuilder 401k’s investment management services and digital setup. And we are offering [free setup](https://www.sharebuilder401k.com/ "ShareBuilder 401k home page with link to free setup promotion") on all plan types now through July 3, 2020:

Truly [any size business can have a 401(k) plan](https://www.sharebuilder401k.com/blog/any-size-small-business-can-offer-a-401k-to-save&receive-significant-tax "Any Size Small Business Can Offer a 401(k) to Save, Receive Significant Tax Benefits, and Have Access to Money in Times of Crisis") so if you’re self-employed, here is [additional insight and video for you](https://www.sharebuilder401k.com/blog/is-a-solo-401k-plan-better-than-an-ira-for-the-self-employed "Solo 401k insights and comparison to an IRA") as well. Happy saving.

How Your Asset Allocation Affects Your 401k

Asset allocation in investing refers to how much of your money is kept in different investment types — stocks, bonds, or cash. There are other asset classes like real estate and commodities, but stocks, bonds, and cash are typically the core options in your 401(k) and what most people use in building a nest egg for retirement. Experts and [respected studies](https://blogs.cfainstitute.org/investor/2012/02/16/setting-the-record-straight-on-asset-allocation/ "Setting the Record Straight on Asset Allocation - CFA Institute Blog") show that other than making the decision to invest that your asset allocation is the next most important decision you’ll have to make. To build your nest egg over time, you need to consider some important performance facts. Since 1926, U.S. large cap stocks (e.g. the S&P 500) have delivered 10.0% returns annually, long-term government bonds 5.5%, and cash 3.3%. And since 1960, inflation has averaged ~4% a year. Currently, interest rates on cash are very low, and inflation is half of the historic average. It stands to reason that a sizeable amount of your investment ought to be in stocks to build up your retirement account. Read on as there is more to consider. You might think, given the fact that stocks have historically provided better returns than bonds and cash, why wouldn’t I just put all my retirement savings into stock funds? There are two answers to this question: 1. First, there’s no guarantee of future returns. Past results are not a guarantee of future results. Diversifying across asset classes can offer assistance as one class may perform while another suffers in differing economic environments. 2. Second, stocks have had years when returns increased greater than 20%, and periods where they have declined 20% or more. Those are big swings. Think about 2020. The stock market tumbled over 33% by March, only to quickly rebound and have strong returns by December. That was a wild roller coaster. In March of 2020, you might have felt like you lost a lot of money, and then a year later, you might be psyched. Just know that stocks are likely to go up and down at a much greater percentage than bonds and cash. Because the [stock market is volatile](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down "Do I Adjust My 401(k) When Markets Are Down?"), and bonds can be worth more in periods when stocks are going down (and vice versa), investing a percentage of your savings away from stocks is a good idea. You’d hate to reach retirement age at a time when stocks are down significantly, and you have no other investments, so you take real losses on your investments. Remember, there are no true gains or losses until you sell an investment. __Put Time on Your Side__ Generally, the more time you have until retirement, the more time you have to navigate through market ups and downs. A person in her mid-twenties might consider investing more in stocks — upwards of 90% — and just 10% in bonds. A person who is 62 and will be retiring in three years may be better served with an allocation of 60% in stocks and 40% in bonds. Remember, even at 65, you will be relying on your savings for 15 to 30 years or more. So, you still have time to have some money in stocks and ride out the inevitable market potholes in the road ahead. To figure out the right asset allocation for yourself, you’ll need to think about your risk tolerance. __What’s Your Tolerance for Risk? Consider It and Manage to It__ When it comes to investing, it’s extremely important to know yourself. If you’re uncomfortable seeing your savings swing with the markets or lose value for a period of a year or more, you should build a more conservative portfolio comprised of perhaps 60 to 70% in bonds and 30 to 40% in stocks. If you take a conservative approach, you won’t likely reach you goals quite as fast, but you’ll likely sleep a whole lot better at night. You’ll want to [think about how much](https://www.sharebuilder401k.com/blog/how-much-to-save-for-retirement "How Much to Save for Retirement") more to contribute if a conservative approach fits you. If you are comfortable riding the big waves, allocating much more in stocks than bonds will be for you. There is no right or wrong answer, it’s just knowing and figuring out what puts you on the right course to meet your goals. __Not Sure Which Funds to Pick in Your 401(K)?__ At ShareBuilder 401k, if you are comfortable picking your own investments, you can pick from a carefully [curated list of funds](https://www.sharebuilder401k.com/services-investments/etf-lineup "A High-Quality Lineup Designed to Help You Save More for Retirement") by asset class. But if you are new to investing or prefer experts manage your allocation, simply pick one of our [model portfolios](https://www.sharebuilder401k.com/services-investments/model-portfolios/ "Model Portfolios that Fit Your Risk Tolerance"). The model portfolios range from stable to aggressive, so you can find the one that best describes you as a person and select it. If you don't have model portfolios in your 401(k) plan, you may want to consider a target date fund. Target date funds aren't as precise in considering your risk tolerance versus a model portfolio, but it can be a good way to get started when there aren't model portfolios. __Bonus Tip: Auto-Rebalance__ Each day, month, and year, stocks and bonds will perform differently. This will push your portfolio allocation off from what you’d originally setup. It’s good to let assets move a bit as they will over a period and then to rebalance back to the allocation amount you prefer. Rebalancing helps you manage risk and to stay on strategy versus letting your investment drift over years and potentially put you at greater risk during volatile times. Many providers offer a feature called auto-rebalancing, so you don’t need to continually watch and calculate this on your own manually. Quarterly auto-rebalance is a good method and frequency to manage your asset allocation. So, select auto-rebalancing and put this piece on autopilot, and then each year, revisit your risk tolerance and adjust your asset allocation as needed to fit you.

How to Maximize Your 401k Retirement Savings

Many of us get busy and forget to check-in on our 401(k) plan on even an annual basis. And when we do, we’re often unsure of what adjustments to make to put ourselves in a better position for a more comfortable retirement. Fortunately, there are some sound moves that only require about 15 to 20 minutes and that will help you maximize your retirement savings from your 401(k): 1. [Give your 401(k) a raise](https://www.sharebuilder401k.com/blog/give-your-401k-a-raise "Give your 401k a raise when you receive a raise") when you receive a raise at work. Most experts suggest putting in 10%-15% of your paycheck toward retirement. Yet most people don’t. A smart way to increase your retirement savings is to give another percent or two of your salary to your 401(k) each time you get a raise so that you still receive more take-home pay and also put away more for retirement. 2. How much you put in stocks, bonds, cash and the like (your “[asset allocation](https://www.sharebuilder401k.com/blog/how-much-you-put-in-stocks-bonds-and-cash-is-a-big-deal-for-your-401k-savings "How much you put in stocks, bonds, and cash is a big deal for your 401k savings")”) is a big determining factor on how much you’ll have in retirement. Whether you pick funds on your own or prefer the convenience of a model portfolio managed by experts, do ensure you are auto-rebalancing. Because different assets will grow at different rates each year, it’s good to rebalance your retirement account(s) at least once a year if not quarterly, so you are not over-exposed in any area. There are of course no guarantees on gains or preventing losses of your portfolio but maintaining your preferred allocation can help spread the risks of your investments more in line with your risk tolerance and lower the levels of swings you might see in your account over time. Most plans have an auto-rebalance feature to automate this for you. 3. If you feel comfortable selecting your own investments from your company’s 401(k) fund roster, look for the [index funds](https://www.sharebuilder401k.com/blog/whats-an-index-fund "how index funds lower investing costs and can help you save more") or other low-expense options (all ShareBuilder 401k investment are index funds except the money market). Historically, low-expense funds have out-performed high expense funds over time. Check the five- and 10-year performance numbers as another checkpoint. Over a 30- or 40- year career, even paying one percent less in investment expenses can add up to hundreds of thousands of dollars more in savings. 4. Consider how your earnings and tax situation are trending and if you want to consider making Roth 401(k) contributions if you aren’t already. If you are likely to be in a higher tax bracket or just believe taxes will be higher for you in the future, contributing some or all your contributions in the Roth 401(k) option can be a smart move. Consider your tax management needs for this year versus the future to determine what percent you may want to contribute towards Roth (after-tax) vs. tax deferred (before tax). Note that all employer matching contributions must be made tax deferred. Want more insights on the Roth 401(k) features in most plans, [just check out this blog](https://www.sharebuilder401k.com/blog/roth-401k-meet-roth-iras-more-versatile-big-brother "Roth 401(k) pros and cons and differences from Roth IRA"). __Extra Credit Move__: If you [left behind a 401(k)](https://www.sharebuilder401k.com/blog/what-to-do-with-that-old-401k-you-left-behind "What to do with that old 401k account you left behind") at another company, it may make sense to consolidate them in your current 401(k) account. Having one log-in, one phone number, and one account to manage can offer greater ease and simplicity. It also helps ensure you don’t lose sight of any of your retirement savings and makes it much easier to manage your asset allocation versus trying to do it across multiple providers and accounts. Of course, check your 401(k) plan to ensure it has the diversification and low-expense options you’re looking for. If not, an IRA may be the better place to consolidate.

How Automatic Investing Helps You in Good Times and Bad

The stock market can be a scary or thrilling roller coaster depending on how you look at it. Heck, just in the last year, the stock market (e.g. the S&P 500) dropped 26% in three weeks’ time and then ended up over 16% for the entire year. That is a big swing and that can be stressful for many of us. Markets are unpredictable. However, if you make investing for your retirement in a 401(k) or IRA automatic with each paycheck, it can help you benefit from dollar-cost averaging and help you [stay the course during volatile times](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down "Investing in volatile markets"). __How Does It Work?__ In a 401(k), with each paycheck you are putting a percent of your salary towards the investments you selected. (If you don’t have access to a 401(k) or if you have extra money to invest, you could set up a bi-weekly auto-ACH from your bank account into an IRA or retail investing account). No matter what is happening with the markets, you are contributing a set amount on a regular, frequent basis. When markets drop, your money will buy more shares, and when markets rise, you are buying fewer shares – this is dollar-cost averaging. While there are no guarantees, over the long-term, dollar-cost averaging can help build more wealth. This example shows how it can work: ##### The Upside of Dollar Cost Averaging | **Period** | **Amount Contributed** | **Fund Share Price** | **Shares Purchased** | | ------------ | :----------: | :----------: | :----------: | | 1 (market high) | $500 | $100 | 5 | | 2 (market low) | $500 | $50 | 10 | | 3 (recovering market) | $500 | $75 | 6.67 | | Totals | $1,500 | $75 average | 21.67 | | Value | $1,625.25 | 21.67 shares x $75 | | By sticking with your investing plan in this hypothetical scenario, your account value is currently 8.35% better off even though the market has not come close to exceeding the previous high of $100 per share. Some people try to time the market, but historically, many end up selling when markets drop in fear of “losing” money, and then buy back in when markets are doing better. This is the exact opposite of what you want to do as you end up selling at a low price and buying at a high price and achieving poor returns. By putting your long-term investing on autopilot with dollar-cost averaging you help avoid bad temptations to sell at a low, and you can help put yourself in position for a bigger nest egg too!

Any Size Small Business Can Offer a 401k to Receive Tax Benefits

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](https://www.sharebuilder401k.com/blog/can-i-access-my-401k-or-ira-money-and-what-are-the-CARES-Act-options "Can I Access My 401(k) or IRA Money and What Are the Added Options under the CARES Act?") to bridge to more normal times. Further, the money is typically [protected from creditors](https://www.sharebuilder401k.com/blog/are-401k-monies-protected-from-creditors-and-bankruptcy/ "When 401(k) Monies Protected from Creditors and Bankruptcy") 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](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes "How 401(k) Profit Sharing Helps Businesses Lower Taxes, Maximizes Owner Savings, and Rewards Employees"), 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](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k "New Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years"). 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](https://www.sharebuilder401k.com/blog/2020-small-business-retirement-outlook-top-challenges-for-small-business "2020 Small Business Retirement Outlook: Top Challenges Small Business Owners Face and Keys to Unlocking the Small Business Savings Gap") 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](https://www.sharebuilder401k.com/blog/what-401k-plan-services-your-business-will-need-and-value "What 401(k) Plan Services Your Business Will Want and Value") 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](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax "401(k) Matching Isn't Required and It Can Be 100% Tax Deductible"). 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](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles "ERISA 3(38) Advisor Fiduciary Duty and Understanding When a Provider is a 401(k) Fiduciary") 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.*

Secure Act 2.0 Overview

Thanks to the federal SECURE Act 2.0 retirement that is now law, employees, retirees, and small business employers can now enjoy more ways to save, have greater access to monies in emergency, and manage retirement savings better as they age. With over 90 provisions, there are lots of changes that could affect your 401(k) and IRAs, as well as your business if you are a business owner. This new legislation provides some safety nets for emergencies, hardships, and other surprises. It also includes bigger [startup credits](https://www.sharebuilder401k.com/blog/secure-act-2.0-401k-tax-credits-for-small-business "Secure 2.0 401k tax credits for small business cover most all 401k plan costs") to encourage small businesses to start a 401(k), higher catch-up limits for those 60-63 years of age, and an increase to the minimum age for required minimum distributions (RMDs). Let’s take a closer look at a few key updates. __Tax Credits for up to 100% of 401(k) Startup Costs__ If you own a small business and you haven’t started a 401(k) plan yet, now’s a great time to do so. Starting in 2023, the following updated tax credits apply: - Businesses with up to 50 employees are eligible for a credit of up to 100% of their 401(k) plan startup and administration costs. Those with 51-100 employees can receive credit for 50% of these qualified business costs (same as today). The startup credit for both is capped at $5,000 per year for three years, for up to a total of $15,000 in tax credits. - There is also a new tax credit to help cover employee contributions. For the first 50 employees, you can receive up to $1,000 for each employee making under $100,000 per year. The credit starts at 100% for the first and second year, decreases to 75% for the third, 50% for the fourth, and finally drops to 25% for the fifth year. For employees 51-100, a lesser tax credit applies. If you have over 100 employees, you do not qualify for this tax credit. These tax credits should more than cover your business costs as well as much of contributions as well. For employer contributions not covered by the tax credit, these can be tax deductible for your business. The new employee contribution credit is applicable to plans set up after December 31, 2022, and doesn’t apply to defined benefit plans. [Read our article](https://www.sharebuilder401k.com/blog/secure-act-2.0-401k-tax-credits-for-small-business "Secure 2.0 401k tax credits for small business cover most all 401k plan costs") that covers the small business 401(k) tax credits in deeper detail including hypothetical examples for more insights. __Important RMD and Other Updates for Savers Aged 60 to 75__ A few major changes are in store for Americans approaching retirement age. First, catch-up contributions are on the rise. Currently, employees aged 50 and up can make an extra $7,500 in annual contributions to their 401(k) plan. In 2025, employees aged 60, 61, 62 and 63 can now make a total of $10,000 in catch-up contributions per year (or 50% of that year’s catch-up contribution limit, whichever is greater). These new limits also apply to SIMPLE plans, which were previously capped at $3,000 annually. Starting in 2023, the minimum age for Required Minimum Distributions (RMDs) will increase from 72 years old to 73 years old. This number jumps to 75 years old in 2033. And finally, RMD requirements were eliminated for [Roth 401(k)s](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/ "Roth 401k or regular 401k contributions, which is best for you"). This means that participants in either a Roth IRA or a Roth 401(k) plan do not need to make a mandatory distribution of Roth monies. This becomes effective in 2024. __More Time to Set Up and Contribute to a Solo 401(k)__ Good news for sole proprietors and single-member LLCs who didn’t set up their 401(k) by the end of their fiscal year. Starting in 2023, if you set up a new [Solo 401(k)](https://www.sharebuilder401k.com/blog/benefits-of-a-solo-401k-plan-for-self-employed-individuals/ "Benefits of a solo 401k plan for the self-employed or owner-only business") after the end of your taxable year but before your filing date, you can treat your plan as if it was established before year-end. That means plan sponsors can make contributions all the way up to their tax filing date to be applied to the “previous” year. __Emergency, Hardship and Disaster Relief__ The SECURE Act 2.0 helps savers stay afloat when troubles arise by making it easy to access extra cash without a 10% early withdrawal penalty. Starting in 2024, savers can enjoy penalty-free withdrawals for emergencies, up to $1,000 per year. Employees can choose to repay these withdrawals back into their plan, as long as it’s done within three years. Also beginning in 2024, an employee can self-certify as a domestic abuse survivor, clearing the way to a penalty-free withdrawal up to $10,000 (or 50% of the participant’s account). Those affected by a federally declared disaster can withdraw up to $22,000 from their IRA or employer-sponsored retirement plan, penalty-free. Funds withdrawn will be treated as gross income over a period of three years. These benefits are applicable to disasters that happened on or after January 26, 2021. There’s now also a new option for employers offering a pension plan (as opposed to a 401(k) plan). These employers can elect to link their lower-income employees’ pension plans to a savings account. Typically, about 3% of employee compensation will be put into a separate emergency account, up to $2,500 per year. Then, if needed, an employee can make four withdrawals out of this account per year, penalty-free. __Expansion of Automatic Enrollment__ The SECURE Act 2.0 encourages employees to participate in a retirement plan by expanding [automatic enrollment](https://www.sharebuilder401k.com/blog/what-is-401k-automatic-enrollment/ "What is automatic enrollment"). For plan years starting in 2025 or later, all 401(k) and 403(b)-eligible employees will be automatically enrolled – unless they decide to opt out. All 401(k) and 403(b) plans set up before January 1, 2025, are exempt. Other exceptions include small businesses with under 10 employees, new businesses under 3 years of age, along with church and government plans. __Other Important Updates__ Here are some additional highlights from the new legislation. Effective in 2023: - Employers can offer added incentives to encourage employees to participate such as a small gift card. - Small businesses providing retirement benefits to military spouses are eligible for a maximum tax credit of $500. - Employers can convert a SIMPLE IRA to a [Safe Harbor 401(k)](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/ "What is a safe harbor 401k plan explained") any time during the year. __Effective in 2024:__ - Student loan payments can be treated as elective deferrals for purposes of matching contributions into a 401(k) plan. - Employers can transfer former employees’ retirement account balances from a workplace retirement plan into an IRA if their balance is between $1,000 and $7,000. __Effective in 2025:__ - The Department of Labor will set up a “Lost and Found” database that will track all employee plans and administrator contact information, so you can find that old 401(k) you may have left behind. - Part-time employees are encouraged to save in a 401(k) plan. The current rule requires those that work 500 hours for three consecutive years to receive access to a company’s 401(k). This changes to two consecutive years for plan years after December 31, 2024. Know that the 1,000-hour rule continues to apply (any employee that works at least 1,000 hours in a single year must be provided access to a company’s 401(k) plan). Looking to the future, in 2027 a new “Saver’s Credit” will help individuals reduce up to $1,000 off their taxes ($2,000 for married filers). Offering a 401(k) is a great way to attract new talent and help current employees stay financially healthy, while your business receives some great tax credits. If you want to learn more about ShareBuilder 401k plans, we’re here to help.

Where Small Businesses Can Apply for Grants During the COVID-19 Pandemic

While there are signs of more States finding a way to ease back into opening up their economies, many small businesses need access to cash now. The [SBA PPP program](https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program "SBA PPP Loan Information Link") is still offering loans as of this writing. However, if this is not a fit for you due to the requirements, there are other corporations and organizations that are trying to help via access to cash grants and other resources. Here’s a list of corporations that are offering assistance during the pandemic and some ongoing with links to the associated information for your consideration: 1. [Google](https://blog.google/inside-google/company-announcements/commitment-support-small-businesses-and-crisis-response-covid-19 "Google grants and ad credits information") is providing grants and ad credits – a fund of over $800M to help during the crisis. 2. [Verizon Small Business Recovery Fund](https://www.lisc.org/covid-19/small-business-assistance/small-business-relief-grants/verizon-small-business-recovery-fund/ "Verizon Small Business Recovery Fund information") is a $7.5M fund. Application deadline is May 20th (today). 3. [Amazon](https://amazonsmallbusinessrelief.force.com/SelfRegisterPage "Amazon Seattle Small Business Relief Fund information") has created a $5M fund for Seattle businesses with 50 or fewer employees. 4. [Salesforce.com](https://www.salesforce.com/blog/2020/04/salesforce-care-small-business-grants.html "Salesforce.com small business grant and product support information") created a fund of $5M and is offering some of its cloud solutions as well. 5. [Nav’s “Legitify Your Small Business” Grant](https://www.nav.com/resource/small-business-grants/#nav "Nav's small business grant information") is offering $10,000 grants to small businesses. 6. [Small Business Innovation Research Program](https://www.sbir.gov/about/about-sbir "Small Business Innovation Research Program grants information") may be a fit for businesses in this arena. 7. [USDA Rural Development Business Grants](https://nifa.usda.gov/apply-grant "USDA grant information") offers various grants for food and agricultural businesses. [Facebook](https://www.facebook.com/business/boost/grants "Facebook grant and resources information") committed to offering $100M for up to 30,000 businesses in cash grants. This recently closed out but they may be providing other resources soon. For other ideas on [managing costs](https://www.sharebuilder401k.com/blog/small-business-assistance-resources-to-improve-your-operating-cash "Small Business Assistance Resources, Improving Your Operating Cash, and What is Likely in the Government Stimulus Program") through this time as well as [CARES Act options](https://www.sharebuilder401k.com/blog/how-small-business-can-manage-cash-for-survival "How Small Business Can Manage Cash for Survival and the CARES Act Adds New Emergency Access to Retirement Monies") to access retirement monies, give our previous blogs on these subjects a read. Wishing you well.

What to Do with that Old 401k You Left Behind

Many of us have switched jobs and employers in our lives. In fact, according to the Bureau of Labor Statistics, we will change jobs 12 times in our lifetimes! And it’s pretty common that we’ve left that 401(k) account from that previous employer or two behind. When you’re busy starting a new job, taking the time to move your 401(k) can sit on the back burner. But what ought you do with those "old" 401(k)s? Leaving old 401(k)s where they are is likely the wrong call for a lot of reasons. In general, moving it to your current company’s 401(k) plan can offer you many benefits such as: 1. __One Account Is Easier to Track and Simplifies Managing Your Investments__ When you have multiple retirement accounts, you have several logins to remember and phone numbers to call if you need help, and all of your important info is in various places. By consolidating your accounts into just one 401(k), you’ll see your retirement savings in one place, and it makes managing your asset allocation easier than ever, as opposed to trying to do it across multiple providers and accounts (not fun). 2. __Access to Your Money Via a 401(k) Loan__ While you should look at this only as an emergency option, many companies allow loans in their 401(k) plan. If yours does, you can receive a loan for half your vested balance up to the $50K limit and then pay yourself back into your 401(k). You won’t be able to do this from your former employer’s 401(k) plan, only your current one. There are [some pitfalls to avoid](https://www.sharebuilder401k.com/blog/401k-loans-the-good-the-bad-and-the-ugly "401(k) loans: The good, the bad and the bottom line") if you consider taking a loan, so learn more about how they work before you do. 3. __Your 401(k) Money Is Protected from Creditors and Bankruptcy__ The money you have in your [401(k)s has protections against creditors](https://www.sharebuilder401k.com/blog/are-401k-monies-protected-from-creditors-and-bankruptcy/ "Are 401(k) Monies Protected from Creditors and Bankruptcy?") including in bankruptcy, as well as against claims from creditors. 4. __Option to Put Off Your Distributions Longer__ Retirement accounts require minimum distributions to begin at age 72. However, if you’re still working, you can postpone distributions from your current 401(k) until you retire which can be well past the age of 72. It may take a few phone calls and a few forms, but managing your money well can really make a difference and worth the effort. To consider other pros and cons of what to do, check out our [more in-depth blog](https://www.sharebuilder401k.com/blog/the-pros-and-cons-of-rolling-an-ira-or-old-401k-into-your-401k-account "The Pros and Cons of Rolling an IRA or “Old 401(k)” into Your 401(k) Account") on this subject. Happy saving.

IRA vs 401k?

Even if you’ve never pursued a retirement plan for you and your business before now, you’ve likely heard about IRAs and 401(k)s. These are the two most common types of retirement plans out there, and for good reason, because they both offer tax advantages to save for your future. __Who Is Allowed to Start an IRA versus a 401(k)?__ An IRA can be opened by any individual with earned income, so it’s very accessible for most Americans. By comparison, a 401(k) must be opened by someone who owns a business, and [this includes the self-employed](https://www.sharebuilder401k.com/products-pricing/solo-401k "Solo 401(k) plans -- made for the self-employed") as well as companies with employees. So, although a typical worker cannot start their own 401(k), many business owners offer this plan type to their employees due to the added benefits, which of course is why it’s a widely popular retirement plan. __What Are the Biggest Differences Between an IRA and 401(k)?__ There are some notable differences between IRAs and 401(k)s. The biggest is that they have very different contribution limits. For example, you can only contribute up to $6,000 to an IRA for the 2021 tax year (or $7,000 if you’re over age 50). On the other hand, an employee participating in a 401(k) plan can contribute up to $19,500 this year (or $26,000 if over age 50). However, [that’s not all you can put into a Solo 401(k) plan](https://www.sharebuilder401k.com/blog/is-a-solo-401k-plan-better-than-an-ira-for-the-self-employed "Is a Solo 401(k) better than an IRA for the self-employed?"). You can also make employer contributions. That’s the beauty for the self-employed -- you are both the employee and employer. If you’ve heard of matching or profit sharing in a 401(k) plan, well, that’s what the employer does. As an owner-only businesses, you can contribute up to $58,000 for the 2021 tax year (or $64,500 if over age 50) assuming you have the earnings to do so (there is a calculation –typically 20%-25% of earnings can be contributed as an employer up to the limit). So, as you can see, the 401k plan provides much more saving power over an IRA. | 401(k) Advantages Over Traditional IRAs in 2021 | 401(k) | IRA | | ----------------------------------- | :-: | :-: | | Annual limit per individual | $58,000
(employee + employer contributions) | $6,000 | | Age 50+ catch-up amount | $6,500 | $1,000 | | Roth income limit | None | $140K* | | Penalty-free access, if needed | Yes, via a loan | No | ^{*Beginning at $125K, the amount you are allowed to contribute begins to decrease, hitting $0 at $140K for singles (range is $198K to $208K for married couples filing jointly)} __401(k) Offers Penalty-Free Access to Money in Emergency__ But wait – as you can see in the chart above – there’s more! Unlike an IRA, the 401(k) plan can include a loan feature, which gives you more flexibility when you need to take funds out of your retirement plan. If you pull funds out of an IRA before age 59 and ½, you’ll typically pay taxes on those funds along with an early withdrawal penalty. However, these penalties can be avoided when taking a loan from a 401(k) plan. The loan feature allows you to request up to half of the assets in your 401(k), not to exceed $50,000, and typically must be repaid within a 5-year period to avoid taxes or penalties. This is typically a pretty automated payback process to your account. __Retire Tax-Free with Roth Savings!__ Another feature worth considering is the Roth contribution. You may be aware that an IRA can be opened either as a Traditional IRA or Roth IRA, which determines the tax treatment of your contributions. Traditional IRA contributions are tax-deferred, meaning that you’ll save on taxes for the year you’re contributing and pay taxes when withdrawing your contributions (and earnings) in retirement. In contrast, the Roth IRA has the opposite tax effect. You’ll pay taxes on contributions during the year you’re contributing, but all contributions and earnings can be withdrawn tax-free in retirement (after age 59 and ½). A 401(k) plan can also offer both traditional and Roth contributions with a couple added advantages: 1. Roth IRA contributions still have an annual limit of $6,000 as mentioned above, while the 401(k) allows up to $19,500 for the 2021 tax year. 2. Depending on your income for the year, your annual contribution to a Roth IRA may be reduced or eliminated; however, this rule does not apply to Roth 401(k) contributions. Lastly, if you own a business with employees, a 401(k) plan is a great tool to incentivize employees and possibly make retirement contributions of your own. And as a business, plan admin expenses are tax deductible and if you have 1-100 employees you can [receive up to $5,000 in tax credits](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k "New Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years") the first three years of starting the first plan for your business. By now you might be wondering why anyone would start an IRA over a 401(k). First of all, it’s worth mentioning that it’s possible to utilize both plan types when saving for retirement. However, you may be limited to one plan depending on your employment situation or the amount you’re looking to save. If you’re not self-employed or running your own business and your employer doesn’t offer a 401(k), an IRA is likely your best option. Or if you own a business but aren’t looking to save beyond the IRA contribution limit of $6,000 per year, it likely does not make sense to start a 401(k) plan. If these restrictions don’t apply to you, the savings power of the 401(k), along with its added features may make it the perfect fit for your retirement goals!

What Is Compounding and How It Helps Your Money Grow

There’s often-told story that Albert Einstein said, "The most powerful force in the universe is compound interest." Whether he said it or not, the power of compound growth in investing is pretty brilliant. Benjamin Franklin may have said it best in describing it, “Money makes money. And the money that money makes, makes money.” Compounding is the impact of interest, dividends, and price growth securites on the money you invest in securities (e.g. stocks and bonds) and how this builds on itself over a period of time. In fact, with regular contributions plus the power of compounding, building over $1,000,000, if not more, with your 401(k) account is quite feasible. When you contribute to your 401(k) (and receive your employer match too if applicable) and combine it with investment returns over time, you are putting yourself in much better position to be set for life upon reaching retirement age. __An Example on the Magical Power of Compounding__ Here’s an idea of how it can work with this hypothetical example. Let’s assume Anne is able to contribute $10,000 per year ($833 per month) and receives $4,000 per year ($333 per month) as an employer matching contribution. And her investments provide an 8% return each year. As you can see, in 20 years, she has accumulated nearly $700,000 on $280,000 in contributions ($200,000 she contributed and received $80,000 from her employer). That’s well more than double of what she put in. ![Power of Compounding](//images.ctfassets.net/wsuay9fbp17w/61KVKfFqW63McTKXzW3Yer/0a6d0a94eb76ad0fd59b1c974aa1e4f6/Compounding.png) Better yet, compounding can provide even greater returns over more and more time. In this example, Anne has over $4,000,000 on $560,000 in contributions ($400,000 of her contributions and $160,000 from her employer) in 40 years! That’s a big, juicy nest egg to retire and pursue other dreams and passions. So, what are you waiting for? [Contribute regularly](https://www.sharebuilder401k.com/blog/how-much-to-save-for-retirement "How Much to Save for Retirement") to your 401(k) and set your course for financial freedom. __Performance Not Guaranteed: Why Investing (like life events) Is Not Guaranteed__ In this example, returns are the same each year. That’s not the real world, although a realistic average return at least historically. Markets are unpredictable. Stocks and/or bonds may do well one year and bad in another. An economic event may occur. There are so many things that cannot be forecast, that markets do swing. If you believe in innovation and the ability for businesses to grow, over the long-term, investing in the markets can build you much greater savings than holding all your money in cash. This example does not consider tax consequences upon withdrawing money in retirement.

What Is an ERISA 3(38) advisor

Every employer takes on [fiduciary duties](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles/ "401k fiduciary duties and roles") in providing 401(k) benefits for employees at their company. One that can be onerous and likely intimidating, is knowing the [rules about the investment offering](https://www.sharebuilder401k.com/blog/which-401-k-providers-are-designed-to-save-you-time-and-lower-your-risks/ "401k rules and duties for investment management") that can be made available to employees. This includes determining the investment roster, monitoring it ongoing, making and documenting changes, regulatory requirements, and more. Many employers aren’t investment experts, and they don’t want or plan to be. There is a pretty easy solve for employers, so let’s quickly dive in so you have the insights to determine the best fit for your company’s needs. __What Is an ERISA 3(38) Advisor?__ The ERISA 3(38) advisor takes on the investment management role for your company in managing the investment options made available in your plan (full discretion of selection, ongoing monitoring and replacing of investments offered). And to clarify from the get-go, the ERISA 3(38) Advisors takes on the fiduciary duty and liability for your firm for these investment manager duties. These duties include fund roster made available in your plan to your employees and the ongoing monitoring and adjustments. The employer, also known as the plan sponsor, relinquishes discretion and influence in the roster decisions. However, the plan sponsor monitors the work of the advisor to ensure the 3(38) is performing its duties in line with your advisory agreement and investment policy of the 401(k) plan. The advisor should make this easy for you by providing reports, often quarterly, of all that’s occurring, and any changes being made and why. It gets better. The plan sponsor(s) is protected from suits and liability for investment roster decisions, and this service saves the company the time, energy, and internal costs of managing the investment roster. __Identifying Top ERISA 3(38) Advisors__ Top ERISA 3(38) advisors have experts including CFAs (Chartered Financial Analyst®) that make up the [Investment Committee](https://www.sharebuilder401k.com/services-investments/investment-philosophy/ "Investment Committee Services and the ShareBuilder 401k Philosophy") overseeing and performing the analysis to find the right options for your plan. They will have proprietary models, leverage modern portfolios theory, algorithms, access to in-depth industry investment and economic data and other tools to help construct your investment roster. They will provide regular reports showcasing the analysis and reasons for decisions. These advisors will have clear investment policies, investment philosophy, and management procedures. For most businesses to have this sort of access and expertise internally is not to be expected and likely expensive too if they did. When you have a top ERISA 3(38) on your plan, everyone can benefit by feeling confident in having a great fund line-up to help build bigger and better nest eggs as well as provide the employer important fiduciary protections. Lastly, know that many 401(k) advisors are not ERISA 3(38) advisors. They leave all or a good chunk of the duties and fiduciary liability on the employer. Also, some advisors may be required to work with only a specific fund provider’s offering vs. looking at the universe of providers and comparing all investment options in each asset class that meet criteria in finding the right option. Just know if your provider is an ERISA 3(38) Advisor and ask for the investment policy, philosophy, and example analysis reports. If that all looks good, you’re in a good spot. If not, this is definitely something important to consider to up your 401(k) roster and company protections. All ShareBuilder 401k plans include ERISA 3(38) Advisory services as part of our bundled, full-service offering.

What is a 401k and Why Get 401k?

When you’re a small business, the thought of offering a 401(k) plan can often be intimidating. *Is it worth the time and energy? Are we big enough to even have one? Do we need to be investment experts? Does it cost much?* The questions are many, and much of the hesitation around setting up a 401(k) for your small business can stem from not fully understanding all that 401(k) offers and what it really is. Here’s a simple way to remember the key points. A 401(k) is: __For your retirement saving and tax management__ It’s a retirement savings plan sponsored by your business. You choose how much you want to contribute to an investment each payroll period, so your money is invested automatically. The savings can be made tax-deferred or after-tax (Roth) to help best manage for your saving and tax needs. __For you and your employees__ Both you and your staff can put money away for the future, and contrary to a popular myth, you don’t need to provide an employer match to have a 401(k) plan. That’s totally optional. The details of [how a 401(k) works](https://www.sharebuilder401k.com/overview/what-is-a-401k/ "How a 401k Works") are simple, too, and the benefits of having one are pretty great. For example, a 401(k) allows you to: - __Save more money each year__ with significantly higher contribution limits than IRAs ($19,500 for a 401(k), as opposed to only $6,500 with an IRA). If your company chooses to match or profit share into the 401(k), top earners may be able to [sock away $58,000 per year](https://www.sharebuilder401k.com/overview/401k-saving-advantages "401k saving advantages and limits"). - __Get tax breaks, credits and deductions__ for you and your business, as most operational costs and plan contributions can be deducted at tax time. Maybe bigger are the [tax credits](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k "Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years") a business starting their first 401(k) that has 1-100 employees qualifies. Credits can be up to $5,000 per year for the first three years. - __Money is typically protected from creditors__ and you take the money with you. If your business faces tough times, your savings are [protected from creditors](https://www.sharebuilder401k.com/blog/are-401k-monies-protected-from-creditors-and-bankruptcy "How 401(k) monies are protected from creditors"). And, you can roll your plan over if you decide to start another company, retire, or convert to an IRA if/when you leave the business. - __Recruit and keep top-performing employees__ by offering a competitive retirement benefit, an awesome incentive. - __Access your money in emergencies__ when you really need it with no penalties or high interest rates (unlike IRAs, which doesn’t allow you to access funds) to take a [401(k) loan](https://medium.com/@stuartrr/401-k-loans-the-good-the-bad-and-the-bottom-line-6517b5dd1858 "Good and the Bad of 401(k) Loans") from your savings. However, there can be added tax consequences on the unpaid loan balance if you leave your company. - __Needn’t cost much to offer a plan__ as there are providers that focus on affordable 401(k) plans that keep costs low (like us) for most any size budget. Plus tax credits and deductions take out even more costs. And some have high-value, responsive service too! - __Some plans come with investment expertise__ that provides [professional oversight](https://www.sharebuilder401k.com/services-investments/investment-philosophy/ "Investment Management Expertise That’s on Your Side") and models to monitor your investment options, so you needn’t be a financial expert to ensure you have great fund options from which to select. Those are some of the compelling reasons why to start a plan and why it’s worth it. So, what about the questions at the beginning of this article? Here are the short and sweet answers: *Is it worth the time and energy?* Short answer: Yes. 401(k) plans can help you build your retirement nest egg while also helping you save on taxes. Those providers that offer digital ease and great services teams can make it turnkey for your company to manage. *Are we big enough to afford one?* Short answer: Yes. A business of any size can have an affordable 401(k) plan, even if you’re self-employed. *Do we need to be financial experts?* Short answer: No. You can rely on your provider’s financial experts (such as ShareBuilder 401k’s Investment Committee) to manage your plan investment options. It’s called an ERISA 3(38) advisor if you want to ensure you are getting what you want. *Does it cost much?* No. A business of 10 can offer a plan for <$100 per month in administration cost for the business. With tax credit and deductions, it becomes pretty minimal expense fast! Plans that use low-expense funds (index funds), we believe help put your team in a better position to have a bigger nest egg (by removing the drag of higher fund expense ratios). For more detailed answers on these and other questions, check out [the 7 myths about 401(k)s](https://www.sharebuilder401k.com/help/401k-myths/ "The Seven Myths of 401(k) Plans"). And here’s more info you may find helpful: [How to Know You’re Ready for a 401(k)](https://www.sharebuilder401k.com/overview/signs-your-business-is-ready-for-a-401k/ "How to Know Your Business is Ready for a 401(k) Plan") [How to Select the Right 401(k) Provider](https://www.sharebuilder401k.com/blog/how-to-select-the-right-401k-provider-and-services-for-your-company/ "How to Select the Right 401k Provider and Services for Your Business") [Why Choose ShareBuilder 401k?](https://www.sharebuilder401k.com/why/sharebuilder-401k/ "Why Choose ShareBuilder 401k")

What Is 401k Plan Payroll Integration?

When you integrate your 401k plan with a payroll provider, employee information such 401k contribution rates and employee salary changes can flow between the systems automatically. This can save you time and can reduce potential for errors too. There are a few things to know upfront. First, not every payroll provider integrates with every 401k plan provider and vice versa. Second, for many businesses, inputing or uploading a file each payroll for 401k contributions is pretty simple. Third, if you take advantage of integration, once it’s setup which takes a little work, it can be a nice win. Lastly, there are two types of integrations, and you will need to see what your providers support to see if it’s what you want. Regardless, payroll integration can be cool, but does not outweigh the duties or [cost and saving benefits](https://www.sharebuilder401k.com/help/understanding-401k-costs/ "Understanding 401k Costs") of having a great a 401k plan vs. an average or expensive one. __180-degree versus 360-degree payroll integration__ Depending on your payroll provider and your 401k provider, you may have 1) no payroll integration options, 2) a 180-degree payroll integration option, or 3) a 360-degree payroll integration option. If you have no integration options, there are generally simple and timely ways to manage, and your 401k provider can help you. 360-degree payroll integration offers the most automated and synched integration. The data exchange is full circle from payroll provider to 401k provider and back to the payroll provider. After you upload employee data (aka. employee census data), you will have minimal involvement. Processing is done automatically. If an employee makes changes to her contribution rate, takes a 401k loan, of if her salary is changed, all this is taken care of via the system integrations. 180-degree payroll integration is a one-way street. The data only flows from the payroll provider to the 401k provider. You can automate the contribution process, but for any changes the employees make, the employer needs to manually update the payroll system. ShareBuilder 401k solutions offer integrations with various payroll providers, so if this of interest, we’re happy to see what can best simplify your benefits.

We Support the Right to Freedom, Justice, and Liberty for All

We as a company felt it important to let all who visit our website, use our solutions, or anyone for that matter, know we support freedom, justice and liberty for all. For all. The “all” needs to be repeated over and over with the backbone of this: [Black Lives Matter](https://blacklivesmatter.com/ "Black Lives Matter website and where you can donate"). We are shocked, saddened, and appalled by what happened to George Floyd, and the countless other incidents like this that have occurred in our nation, and what it still says about our culture and how much further we must go. This has gone on way too long, and there is no better time than now to bring justice and pull together to prevent furture wrongs, peacefully, and finally stop prejudice. __For Our Associates__ While we always strive to treat our associates fairly and equally, we will be even more thoughtful, aware and dedicated to this. Moreover, we will ever be vigilant that we offer a welcoming environment, where diversity is the norm, pay is based on skill and effort (not gender or race) and great ideas come to life. __For Our Clients and Prospects__ Our mission is to Lead Americans to Save. Yes, that’s all Americans that use or are interested in our solutions no matter who you are or where you come from. We know that wealth is not evenly distributed in our nation and that race and our country’s heritage has contributed heavily to this divide. We remain steadfast in trying to make it easier, more cost-effective and inclusive for those using our solutions to build a meaningful nest egg, and we hope, attain financial freedom. We understand there are many things much more valuable in this life than money. Love, liberty, freedom, and justice top the list. We also know money can help provide food and shelter, and it can help people attain dreams and change their and their family’s circumstance. We will be steadfast in our pursuit and work to better each day.

Top Five Tax Reasons to Start a 401k Plan for Your Small Business

Owners and employees can enjoy some pretty cool and powerful tax benefits with a 401(k). In fact, an owner maximizing 401(k) contributions may enjoy greater tax and saving benefits versus not offering a 401(k) plan at all. [Check out our web page](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k "Top Tax Reasons to Start a 401(k) Plan") for an example and greater detail on all the items below. Drum roll please – here are the top 5 reasons to start a 401(k) plan for your business: 1. Enjoy up to $19,500 in personal tax savings this year by starting a plan and contributing up to this limit. Note that if you are at least 50 years of age, you can put away up and protect up to $26,000 with catch up contributions. 2. Lower your tax bracket! This is even more likely to be true for Solo 401(k)s. Yes, even the self-employed can start a 401(k) plan. As a Solo 401(k) user, you are both the employee and employer so you can provide both type of contributions up to the limit of $57,000 in 2020. Yes, if your income level enables this, you may very well drop a tax bracket. [See the example here](https://www.sharebuilder401k.com/products-pricing/solo-401k "How the Self-Employed Can Save $10,000+ in Taxes This Year with a Solo 401(k)") that shows how a Solo 401k user can lower taxes by $10,000 this year (scroll a section down on the page). 3. Take advantage of Roth 401(k) Feature no matter your income. Unlike a Roth IRA, no matter your income level, you can contribute to the Roth 401(k) feature in your 401(k) plan up to the 2020 limit of $19,500. Could be a smart way to avoid or lower paying taxes in retirement. 4. Receive up to $16,500 in tax credits to start your first plan. If you have 1-100 employees, your company can qualify for tax credits that will help cut your business costs in half of offering a plan. With low-cost providers like ShareBuilder 401k, your costs will likely be pretty darn small. 5. If you provide an employer match, it is often 100% tax deductible! That’s right – for the skinny on how this works, [just read this blog](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax "401k matching is tax deductible") on the subject. For more information on any of the top five tax reasons to start a 401(k), [just click to our page](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k "Top Tax Reasons to Start a 401(k) Plan") that gives more specifics. Wishing you great success.

Three Reasons Variable Annuities Are Bad for Your 401k

Whenever markets are [volatile](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down "Do I Adjust My 401(k) When Markets Are Down?") and especially when they drop, many discussions begin about what if anything can be done to generate guaranteed payouts in retirement plans. Some insurance companies want to influence putting annuities in every 401(k) plan as an answer. We believe this is not a good idea. The costs and surrender fees are typically cost prohibitive and can make savers worse off. Just read through the [SEC’s site on annuities](https://www.sec.gov/investor/pubs/varannty.htm "Variable Annuities: What You Should Know"), and the caution call outs will make clear other factors to be wary of too. __What is a Variable Annuity?__ A variable annuity is a mixed security and insurance product. The value fluctuates depending on the value of the underlying investments which are typically a basket of equities, very similar to mutual funds or Exchange-Trade Funds (ETFs). During the savings period, investments grow tax-free just like in your 401(k). At retirement, the person can “annuitize” the value and receive a stream of payments for a guaranteed period, such as 20 or 30 years, until death. When funds are withdrawn, the investment gains are taxed as ordinary income. Some people like the ideas of fixed payments guaranteed. Unfortunately, when you know the facts, you will likely have accumulated less because of the costs; and therefore, have less to live on in retirement. And variable annuity payouts are not truly guaranteed. Even the added death benefit annuities can offer is rarely justified. Complex and costly are typical attributes of these insurance products. __The Three Reasons to Keep Annuities Out of Your 401(k)__ 1. Most variable annuities are expensive!! Variable annuities average expense is 2.3% and can be more than 3% depending on your provider.^ We advocate [paying no more than 1% all-in for investment expenses](https://www.sharebuilder401k.com/why/index-fund-advantage "Advantages of Index Funds and Low-Expense Investments") – the more you spend in expenses the less that stays invested in the markets. The annuity costs (and any fund with expenses over 1%) can really add up and result in you and your employees having tens if not hundreds of thousand dollars __less__ come retirement! High investment expenses are very tough to justify in a 401(k) plan and is beyond most any prudent person’s judgment. 2. Variable annuities typically have surrender charges. The surrender charges are often expensive too and are bad risk for employers to take on within their 401(k) program. For insurance companies to recover the costs of selling annuities and retain customers, they carry surrender charges that will decline over time. A surrender charge is a fee assessed on assets if you move money out of annuities or switch providers. The surrender charges are often five to seven percent of assets in year one and decline one percent a year until they go away over the next five to seven years. During this period, surrender charges are a big cost to change directions. As an employer, you are always supposed to act in the best interest of your employees and ensure fees are reasonable. If you decide you want to switch providers due to lower fees, investment performance, or other reasons, you are probably stuck if you have annuities in your plan until the surrender charges are low or expire. This puts you at risk during this period of not being able to act in your employees’ best interest. 3. The death benefits are of little benefit -- rarely used and can carry a big price tag too. The insurance provider may tout this attribute as a nice safety net for employees’ families. The way the death benefits works, is an employee must both die and have less money in their account than they have contributed to it. Neither is very likely. And in case that it does occur, it is expensive. Let’s assume a person has contributed $100,000 to their 401(k) annuity and died before retirement with a balance of $90,000. The heirs would receive the account balance plus $10,000 in insurance. To get this $10,000 in insurance monies, the participant would have paid 1.25% mortality and expense risk fee on the entire $100,000, or $1,250 every year. Over a 5-year period, the death benefit coverage on balances of $100,000 would cost $6,250 to receive $3,750 more. Over a 10-year period, it could exceed the benefit depending on balances. Annuities could make sense for a part of your portfolio, but not in your 401(k). We believe annuities create real problems in managing a 401(k) plan in your employees’ best interest and these issues far outweigh the need for providing variable annuities in your company’s retirement plan. ^ Source: [Annuity Fees and Commissions](https://www.annuity.org/annuities/fees-and-commissions/ "Annuity Fees and Commissions"), Annuity.org

There Are No Retirement Loans – Five Tips to Build Your Nest Egg

You can request a loan to finance most major expenses in your lifetime including your car, your or your kid’s education, and your home. But there’s one important investment that even the almighty loan cannot assist with: funding your retirement. The only way to build enough money to retire is to do the diligent work of saving. The United States government considers the full retirement age to be 67. You may desire to retire earlier or later that that. However, nearly two-thirds of 40-somethings have saved less than $100,000 for retirement and 28% of 60-somethings have less than $50,000.^ Younger generations are in a similar position as a majority of millennials don’t feel they’re on track with retirement savings largely due to housing costs. Saving for retirement may seem like a daunting task, but there are steps you can take to reach your goal. A comfortable nest egg can likely be had by saving 10% – 15% of your income over the course of your working years. If you didn’t start saving at the beginning of your career, just know it’s never too late to make a difference. Here are some tips to get you started and keep you on track for saving: __1. Prioritize Retirement Saving as a Top 3 or 4 Financial Goal and Get To It__ Many people will put this off as it seems far off. Worse, some even raid retirement savings to help pay for their child’s college. That’s a bad idea. You can get financial aid for college, but who will help you in retirement? After food and shelter, retirement saving needs to be considered pretty high in your financial priorities even if you are unable to put away much at the moment. *Important:* the sooner you start saving, the harder your money can work for you thanks to the [power of compounding](https://www.sharebuilder401k.com/blog/how-your-401-k-can-actually-be-the-gift-that-keeps-on-giving "How money can build over time in your 401k -- the power of compounding"). __2. Put Your Savings on Autopilot by Setting Up a Recurring Contribution__ It’s easier to save consistently when you don’t have to manually setup a contribution every time you think about retirement. Also, if it’s not in your checking account, the less likely you are to use it. 401(k)s make it easy with each payroll if you have access to one. Otherwise, consider an IRA an setup an monthly automated conribution. __3. Look for Ways to Increase your Income and Saving__ Naturally, the more money you’re taking in each pay period, the easier it is to save. If you can, find ways to boost your income at your current job, look for extra hour work you enjoy doing, or look for opportunities to take your career to the next level. If you can’t save 10 – 15% of your income towards retirement right off the bat as many of us are unable, start small and work your way up. Even 1%-2% saved will help get the ball rolling. Then with each raise you receive, give your retirement account a raise too and save another percent or two until you get where you need to be. __4. Get Your 401(k) Match__ If your employer offers a 401(k) and provides a matching contribution, do everything in your power to utilize that benefit. Otherwise, you’ll be passing up on free money in your retirement account. And, this match counts towards getting to 10-15% of your income going towards retirement savings. __5. Leverage the Catch Up in Your Retirement Account__ It’s likely never too late to make a difference in saving a meaningful amount for retirement. Retirement accounts offer you ways to contribute more to help. If you’re over age 50, and you have access to a 401(k), you can contribute an extra $6,500 on top of the normal $19,500 contribution limit for employees. If you are using an IRA, you can contribute and additional $1,000 beyond the $6,500 limit. This can help you catch up if you’re behind on your retirement goals. By following these tips and staying the course over time, you’ll have a good shot at building a nest egg that matters. A loan can help you delay or afford some expenses, but there’s no benefit in delaying your retirement planning, so start saving today! Your future self will thank you. Looking for more information on how to improve how you manage your finances? Give this blog a read: [How to Budget and Manage Your Money Smart.](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart "How to Budget and Manage Your Money Smart") *^ Source: The Harris Poll, Road to Retirement Survey. January 2020 on behalf of TD Ameritrade; n = 2,000.*

Learn Why Safe Harbor 401k Plans Are the Best Fit for Most Small Businesses

For many small business owners, it’s difficult to find a second to consider a 401(k) plan and which plan design will work best for their company. So, it’s not surprising that many owners miss the deadline to start a special, simple-to-manage 401(k) plan referred to as a “Safe Harbor 401(k).” It is the most popular plan type purchased by small businesses for several reasons. Here’s a quick Q&A with important facts to know. __What is the Safe Harbor 401(k) Plan Deadline?__ There are two deadlines to know. The first is October 1st, the government-mandated deadline to start a Safe Harbor 401(k) plan for a business running a calendar fiscal year. The other is September 27th – as it typically takes 401(k) providers a few days to get this type of plan set up before the government-imposed deadline (some require a month). So, get your questions answered and plan purchased by September 27th if you are ready to start taking advantage of the tax and saving benefits Safe Harbor 401(k)s offer. And if you are considering a plan now, ShareBuilder 401k is offering a [discount off setup](https://www.sharebuilder401k.com/ "ShareBuilder 401k home page and offer") for those that purchase before September 27th. __What is a ‘Safe Harbor’ 401(k) plan? [How is it Different](https://www.sharebuilder401k.com/overview/best-401k-for-your-business/ "What 401(k) Plan Design Is Best for Your Business") from other 401(k) plan types?__ Safe Harbor plans enable small business owners and other highly compensated employees (those earning >$130K in 2021) to contribute the maximum amount of their annual income into a tax-deferred retirement account and also automatically satisfy government required non-discrimination compliance tests. It requires an immediately vesting employer matching contribution. The ability to save more without the potential for compliance hassles makes it the popular choice for small businesses and many larges ones too. While some businesses are concerned with the cost of providing a match, it is typically [100% tax deductible](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax/ "Matching isn't required in 401(k)s, but it is tax deductible"), so it’s a cash flow consideration. By providing a ‘Safe Harbor’ qualifying match – the amount an employer puts into an employee’s 401(k) account as a percentage of an employee’s salary – any employee including the owner can give the maximum to the plan and receive the match. 401(k) plans must be run in the best interest of employees. Frequently in smaller companies with a traditional 401(k) plan that offers no match or a very low amount, the more highly compensated employees (such as owners) are restricted on how much they can contribute to the plan if employees don’t contribute a high enough percentage of their salaries on average to the plan. Essentially the U.S. Government wants to ensure that 401(k) plans do not favor “highly compensated employees” over non-highly compensated employees. The government has established required compliance tests to verify all employees have fair representation in a plan. That’s where the Safe Harbor saves the day for businesses that go with this plan type. __What is the maximum annual amount that an owner can contribute to a 401(k)?__ In 2021, it’s $19,500 and $26,000 for owners who’ll be age 50 or older by the end of the year. When you consider employer contributions to each employee's account, [the limit](https://www.sharebuilder401k.com/blog/2021-401k-contribution-and-tax-deferral-limits "2021 401k contribution and tax deferral limits") on both is $58,000 or $64,500 if you are 50 plus. __Who benefits the most – business owners or employees – with a Safe Harbor 401(k)?__ [Both](https://www.sharebuilder401k.com/overview/tax-reasons-to-start-a-401k/ "Top Tax Reasons to Start a 401(k) Plan"). It lowers personal taxes in the current year for the owner and each employee that contributes tax deferred. Owner and employees also benefit from receiving the match. Lastly, the business is able to report any match as a tax-deductible expense (typically 100% deductible as mentioned above) to minimize this cost to the business for providing retirement plan benefits. __Any other important info to know?__ Any business with a headcount below 100 employees and opening their first 401(k) plan can also receive a [tax credit up to $15,000](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k/ "Small business tax credits can cut costs in half to offer a 401(k) plan") for the first three years of the plan to offset setup and/or administration costs. It needn’t cost much to run 401(k) benefits for your business. For more info and FAQs, [visit our Safe Harbor 401(k) page](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "Safe Harbor 401(k) Plans – More Savings, Less Hassle"). Happy saving! *(updated with latest calendar year information - August, 2021)*

Which 401k Providers Are Designed with you in mind?

Many 401(k) providers can make it pretty turnkey these days to set up a 401(k) and get it up and running, which is great! However, not all 401(k) plans are created equal and most can leave employers with added duties and risk they may not even be aware. These can take time and can put extra fiduciary responsibilities on the employer. __Why Investment Management Is a Very Important Part of Every 401(k) Plan__ The investments offered in your 401(k) plan require scrutiny and regular reviews. Every employer is responsible for ensuring their 401(k) is run in the best interest of employees. When it comes to the investment offerings, a regular review of investments is required to provide a diverse, cost-effective line-up that helps minimize the chance of large losses. We all want a line-up that is best situated to grow well over the long-term. The 401(k) regulatory language is there to require a prudent investment approach that includes various fund options covering stock, bonds, cash (asset diversification) to help employees build savings for retirement without taking on undue risks. If an employer does not perform these duties, they can be open to lawsuits and fines. [Lawsuits](https://401kspecialistmag.com/2020-on-track-for-fivefold-increase-in-401k-lawsuits/ "2020 on Track for Fivefold Increase in 401k Lawsuits") do happen and even to [companies](https://401kspecialistmag.com/fidelity-to-pay-28-5-million-to-settle-401k-suit/ "Fidelity to Pay $28.5 Million to Settle 401k Suit") you would never imagine. This can be mostly if not completely avoided with the right 401(k) provider that takes on this fiduciary role for you. __Suggestions vs. Fiduciary Role – What Does Your Provider Offer?__ Many business owners are busy, are not investment experts, and just want a great fund line-up that enables everyone to build for a secure retirement. You might think that every 401(k) provider will do this for you, when in fact many are only offering investment roster “suggestions” with the full duty and fiduciary liability on the employer to oversee the roster. So, though some 401(k) providers may tout their investments, they will take no responsibility, let alone a fiduciary role, in supporting your plan’s investment roster. Rather, these risks and responsibilities lie squarely on their clients’ shoulders. __How to Know If Your 401(k) Provider Takes on the Investment Management Fiduciary Role__ The good news is there are providers (like us) that have an [expert investment committee](https://www.sharebuilder401k.com/services-investments/investment-philosophy "Investment Management Expertise That’s on Your Side") that take on this role and fiduciary duty for you ([known as ERISA 3(38) advisors](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles "Understanding Fiduciary Duties and Roles of 401(k) Plans")), so this part of your 401(k plan can be turnkey too! Better yet, these ERISA 3(38) providers typically will have in-depth tools, economic and market data, investment and expense data, investment algorithms, and leverage modern portfolio theory to construct, monitor, and manage the investment offering for your 401(k) plan. This expertise and investment fiduciary oversight can help you and your employees build a bigger nest egg and save you time, energy and cost of managing this internally. At ShareBuilder 401k, every plan receives this high-level of service, and it’s all included in our pricing. To learn more about different roles a provider takes on as well as the duties to manage a 401(k) plan, visit our page on [Understanding the Roles of a Fiduciary](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles "Understanding Fiduciary Duties and Roles of 401(k) Plans").

Investing 101 for Your 401k

Many people’s first exposure to investing is their employer’s 401(k) plan. But what is investing and what do you need to understand to retire the way you’ve envisioned? Well, let’s cover some basics, offer some quick education resources, and dive into how to think about saving for retirement with your 401(k). __What is Investing?__ Investing is putting your money into assets with the goal to receive income or profit. Common asset classes in investing are stocks and bonds, and may include Real Estate Investment Trust (REIT), commodities, etc. For definitions of these types of investments, scroll through [our glossary][1]. Know that your 401(k) will typically have a fund that holds one or more of these asset types such as a basket of stocks or bonds. __What Types of Investments Do 401(k) Plans Offer?__ 401(k) plans will typically offer a curated list of [Exchange-Traded Funds][2] (ETFs), or traditionally, mutual funds. A 401(k) plan is designed to provide a diversified investment line-up to help you invest for tomorrow while minimizing the chance for sustained large losses. This is typically why you don’t see the option to purchase individual stocks. An employer is required to review and monitor the investment offering to ensure it’s appropriate and has good funds -- or employers will have this professionally managed if they don’t have investment experts on staff (FYI -- all ShareBuilder 401k plans investment offerings are [professionally managed][3]). __How Much Should I Try to Save of My Salary for Retirement?__ While the answer varies by person, in general, you need to save 10%-15%* of your income over a 40-year career to live at your standard of living. The general goal is to get to 10x of your salary at retirement age of 67. For more insights, ideas on how to get there, milestones, and more, read our blog on [How Much to Save for Retirement.][4] __What Investments Should I Pick in My 401(k)?__ If you are new to investing or prefer experts manage your allocation, 401(k) providers like ShareBuilder 401k offer [model portfolios][5]. The model portfolios range from stable to aggressive, so you can find the one that best describes you and your goals and select it. If you don't have model portfolios in your 401(k) plan, you may want to consider a target date fund. Target date funds aren't likely as precise in considering your risk tolerance versus a model portfolio, but it can be a good way to get started as you learn more. Regardless, if you prefer this method, it’s important to understand a few things about how different asset classes like stocks and bonds tend to perform. Historically, stock funds have outperformed all other asset categories common in 401(k) plans. This is no guarantee of future returns for any asset class, but historic data is good to give you some perspective. Here is the performance of common asset categories over the long-term versus the last decade: ![Historic Returns By Asset Class][6] You might think that you should just simply put all your money in stock funds. Maybe if you are 25 years of age that could make sense, but stocks tend to be much more volatile than bonds and treasury bills. There can be years when the stock market is down. Remember the Great Recession? Most people want to diversify and keep more money in stocks than bonds early in their careers, and then adjust to more bond holdings as they near retirement. However, if the market rollercoaster is too much for you, less in stocks and more in bonds is better. To learn more on this subject, read our blog [How Much You Put in Stocks, Bonds, and Cash Is a Big Deal for Your 401(k) Savings][7]. __What If I’m Still Uncomfortable Picking Investments?__ There are both tools and investment options in your 401(k) that can make it easy to get started smart. Some plans offer a [questionnaire][8] that help you determine what kind of investor you are to help you consider which model portfolio fits you. If you still aren’t comfortable, you may want to consult with a financial planner (CFP designation is preferred). The most important thing is to get started when it comes to retirement investing and the sooner the better. The [power of compounding][9] can really make a difference for you down the road. You may want to run some scenarios with a [retirement calculator][10] to see how this might work for you. And finally, congratulate yourself for taking the time to read this as you think and learn more about investing. * *Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.* [1]: https://www.sharebuilder401k.com/help/glossary/ "Glossary of 401k and investment terms" [2]: https://www.sharebuilder401k.com/services-investments/etf-lineup/ "The ShareBuilder 401k ETF Investment Line-Up" [3]: https://www.sharebuilder401k.com/services-investments/investment-philosophy/ "ShareBuilder 401k Investment Management Expertise and Philosophy" [4]: https://www.sharebuilder401k.com/blog/how-much-to-save-for-retirement/ "How Much to Save for Retirement" [5]: https://www.sharebuilder401k.com/services-investments/model-portfolios/ "ShareBuilder 401k Model Portfolios" [6]: //images.ctfassets.net/wsuay9fbp17w/6ozxx4xWIz9PdNJz0Pc5eD/6620e5e0a1bead492af0d04807b83400/Historical_Returns.png [7]: https://www.sharebuilder401k.com/blog/how-much-you-put-in-stocks-bonds-and-cash-is-a-big-deal-for-your-401k-savings/ "How much you put in stocks, bonds, and cash is a big deal for your 401k savings" [8]: https://www.sharebuilder401k.com/services-investments/investment-style/ "What's Your Investment Style?" [9]: https://www.sharebuilder401k.com/blog/what-is-compounding-and-how-it-helps-your-money-grow/ "What is compounding and how it helps your money grow" [10]: https://www.sharebuilder401k.com/help/savings-calculator/ "Retirement Savings Calculator"

How to Invest When Markets Fall Quickly

You’ve probably noticed a lot of big downs in the stock market over the last month (and some nice up days too). Big, fast market drops can be unnerving, especially if you are frequently viewing your 401k balances or other investments you have. First, with investing and similar to life, do expect a rollercoaster, and while there are no guarantees, if you can stick with it you’ll likely be in a much better spot down the road. Second, know that historically stocks have outperformed bonds and savings accounts and have been key to growing wealth and exceeding inflation over time (that said we do suggest investing in different asset classes to better manage risk): ![Historical Investing Returns by Asset Class](//images.ctfassets.net/wsuay9fbp17w/68yE5yA5p4ULWZXvi7Vufl/b3693eeb534decb83c5b04151ef9d3c6/Historical_Returns.png) __Three Things to Know About Investing__ Here are some good things to know that may provide perspective to help you manage your investments wisely when markets fall: 1. __There Are No “Losses” Unless You Sell.__ The reality is, there are no losses unless you sell at a price below the purchase price. Your current value has changed, and it can come back when markets recover. 2. __Down Markets are Normal and Can Offer Opportunity.__ Savvy, long-term investors often see a down market as a time to buy low, so they can sell high later. Although past performance is no guarantee of future results, the future opportunities of a down market can far outweigh a drop in your 401k balance today. 3. __Over the Long-Term, Markets Have Delivered Positive Returns.__ That’s right, in every 20-year rolling period since 1926 (that’s before the Great Depression), the stock market has positive returns. Ingenuity, new products, inventions, and other variables can help businesses grow and in turn, help spur growth in the stock market over time. To learn more and see examples of how jumping in and out of the stock market can hurt your returns, how down markets can help you get better returns over the long-term, and how to think about other aspects of investing like how much to invest in stocks versus bonds, please give our more in-depth article on this subject a read: [Do I Adjust My 401k When Markets Are Down](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down/ "Do I Adjust My 401(k) When Markets Are Down?").

how to take control of your financial life

Whether you have a resolution, a goal, or are just tired of how much time you spend fretting over money issues, now is a great time to read these three blogs and get on track. These are chalk full of perspective, guideposts, and insights to empower you and help put you in control of your finances. As a 401k provider, we spend a lot of time educating employees across the nation on how to manage money and save for tomorrow. These blogs give practical, concise know-how, that we’ve seen help others. It can enable you to put your money to work for you versus feeling overwhelmed by debt or other financial obligations. 1. __[How to Budget and Manage Your Money Smart](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart/ "How to Budget and Manage Your Money Smart")__ Ever have trouble managing a budget or wondering how much should go towards Wants (entertainment, new TV,,..), Needs (rent, groceries, utilities…), and Savings (emergency, general, retirement,…)? Need ideas on how to analyze where you are and how to setup a budget you can feel good about? This blog provides a framework on how to assess your situation so you can put together a financial strategy that works for your household. 2. __[How to Manage Loans and Credit Cards Successfully](https://www.sharebuilder401k.com/blog/how-to-manage-loans-and-credit-cards-successfully/ "How to Manage Loans and Credit Cards Successfully")__ There is good and bad debt, and this blog gets into the nitty gritty here. It will also covers how much to target as the maximum debt to take on when it comes to home or car loans. More important, many Americans struggle with credit card debt. We offer six tactics to get credit card debt under control. 3. __[How Much to Save and How to Prioritize Competing Budget Needs](https://www.sharebuilder401k.com/blog/how-much-to-save-and-how-to-prioritize-competing-budget-needs/ "How Much to Save and How to Prioritize Competing Budget Needs")__ As the headline says, this blog covers various saving needs and buckets, and how to manage all those competing budget needs. This builds on the previous two blogs and suggests the top seven priorities in managing your money, so you can make smart trade-offs when you have competing needs. Cheers to you for taking the initiative to make it happen!

How to Select the Right 401k Provider and Services for Your Company

If you have never offered a 401(k) plan for your business, know that a little online research can help you quickly circle in on what you will need from a 401(k) provider including services, pricing, and investments that can make all the difference. Things to know upfront: - Keeping all-in investment expenses under 1%. Paying more can lead to a much smaller next egg. Few if any Fortune 100 plans pay over 1%, and there is no reason you need to either. Hint: [index funds](https://www.sharebuilder401k.com/why/index-fund-advantage "The Advantages if Index Fund Investing") can be a real win and may put you ahead of the big plans too! - Make sure you choose a provider that is full-service -- has both digital and real, qualified people to service you and your employees quickly and expertly. - Features like Roth 401(k), auto-enrollment, and payroll simplification options can be important too. There is more, so, give these three brief articles a read and get ready to help you and your employees save for tomorrow while lowering your taxes this year too. It should not take much time to manage each month once your plan is setup and live. FYI, each article has links to go deeper into any subject you may want greater detail or just give us a call at 800-431-7934 option 1. - [Five Things to Know Before Setting Up Your First 401(k) Plan](https://www.sharebuilder401k.com/blog/Five-Things-to-Know-Before-Setting-Up-Your-First-401k-Plan "Five Things to Know Before Setting Up Your First 401(k) Plan") - [How to Choose the Best 401k Provider for Your Business](https://www.sharebuilder401k.com/blog/how-to-choose-the-best-401-k-provider-for-your-business "How to Choose the Best 401k Provider for Your Business") - [Six Steps to Setting Up a 401(k) Plan](https://www.sharebuilder401k.com/overview/steps-to-setting-up-a-401k "The Six Steps to Setting Up a 401(k) Plan") Happy saving!

Compare 401k Providers

You have a 401(k) plan for your business which is great. But how do you know you have a top plan? The differences can be big across components. This can include the ease in which you are able to run the program, investments, employee education, as well as how to minimize costs and risks for you and your company. Top questions to answer: • Are you keeping costs low – especially for employees? • Do you have a great investment line-up? • Do you have the right plan design and education program? • Are you minimizing the risk to the company for running 401(k) benefits? • Are you getting the service you expect? To answer these questions and others you might have, there are two primary areas to understand and each of these break down into clear components: 1. Core Services & Costs a. Investment Offering & Management b. Recordkeeping & Administration c. Custodial 2. Plan Support a. Plan Sponsor 401(k) Consultant (design and goal delivery) b. Digital experience c. Education program d. Call Center and Service Levels e. Compliance __Comparing Core Services and Costs__ Recordkeeping and administration ensure your employees accounts are record kept correctly, can be accessed and managed digitally (mobile or computer), and your plan is administered in a compliant manner with the regulations. Your provider should offer an employee 800# line for questions or service in case an employee has a unique need or is unable to access the site. In addition, the 401(k) monies must be held in safekeeping and that is the role of the Custodian which is often a subsidiary of the recordkeeper. When you compare these recordkeeping and administrative costs, know that your business likely pays these directly, but sometimes a provider passes these on to employees. If your plan value is large enough, sometimes these costs can be absorbed elsehwere. As the business can deduct recordkeeping expenses from taxes, and these costs are typically low (e.g., a plan with 10 or less employees might pay ~$100 per month), it’s generally more cost efficient to have the business cover if they aren't aborbed elsewhere. An exception would be a plan that is just starting and has 500+ employees. This situation may require some of the admin to be covered by employees with a flat monthly charge (e.g $4 per month). But with growth of the plan monies, this can be removed. Custodial costs may be included with recordkeeping or may be pretty small investment management charge. Check to see where these fall, but they should be minimal. Then there are investment expenses where a lot of costs can be buried or not truly considered, yet these costs are likely the most important. These can dramatically impact how much you and your employees have come retirement. In most plans, fund expense ratios are the core investment expense. All fund expenses should be under 1% and many even under 0.2%. You’ll want to consider asset class coverage as well as long-term performance of funds but know that [index funds historically have held a significant edge over actively managed funds and life insurance products](https://www.sharebuilder401k.com/why/index-fund-advantage "Index fund advantages -- historic cost and performance overview"). While there are no guarantees, we believe a fund line-up built with most, if not all, index funds put your employees in a better position over time. Paying less in expenses means more of your money stays invested in the markets. It's important to know if you have a provider that is an [ERISA 3(38) investment advisor](https://www.sharebuilder401k.com/blog/which-401-k-providers-are-designed-to-save-you-time-and-lower-your-risks/ "which 401k providers are designed to save you time and lower your risks"), how the provider manages your fund line-up (or not), and how you are charged for investment services. We believe most businesses do benefit from ERISA 3(38) investment management services as it ensures a high level of investment oversight by experts with tools and models business owners may not have access, plus it protects the business owners and sponsors from employee concerns or litigation on fund selection. [Good providers will lower your costs automatically ](https://www.sharebuilder401k.com/products-pricing/automatic-pricing "Automatic Pricing Discounts")including recordkeeping as your plan exceeds designated money milestones for the plan. Again, fund expenses and investment management services should not exceed 1% of assets and should lower as your plan monies grow to ensure you are always getting great value. __Plan Support and Costs__ Last but definitely not least, there is [the support you need to ensure your plan is run well](https://www.sharebuilder401k.com/services-investments/overview "Exceptional 401(k) Service") from design to investment as well as employee education programs. Some providers will charge separately for some of these consulting and education services. Others include it as part of their normal pricing. In general, we believe it should be included in your normal pricing. When thinking about what is essential, a dedicated lead to ensure your plan is setup correctly and employees are provided education at launch is a must. And, as your plan grows, having a dedicated lead will make plan design and investment discussions meaningful and productive. You can work to establish goals the consultant can work to impact to improve saving rates, participation rates, and keep costs in check. As important, are the education approach and resources to help employees save smart. For example, ShareBuilder 401k has blogs, webinars, in-person employee education meetings, videos, and more to meet employees where and in which media they prefer to use. Do consider the digital experience, potential for payroll integration or simple uploads, and other means that make your plan run smoother. Make sure your provider has a service level for answering calls (e.g., 80% of calls answered in 20 seconds or less) and will get back on emails in 24 hours or less. Now is a great time to receive a 401(k) plan check-up. Not only will you learn what sorts of opportunities exist with your plan, but it’s also a great way to stay in line with the Department of Labor best practice of a regular plan cost review. We’re always happy to run a cost analysis and business risk assessment of your plan and detail the pros and cons of your plan so you can make the best decision for your business.

How to Budget and Manage Your Money Smart

Many people don’t want to talk about money, especially if they may be facing financial problems. No matter your relationship with money, you are not alone. Anyone can take control of their financial life with a good framework and a little math. Better yet, you can get on the road to financial freedom! It’s not surprising that managing money is a problem for many Americans. Unless your parents or a close friend educated you, you probably just didn’t know. Doesn’t it seem odd that money and budget management is not in most of America’s K-12 curricula? Even a two-hour course would give most people a huge boost in confidence to make the most of their money. Well, it’s never too late to take control. This post is the first of a three-part series that will cover how to think about: 1) assessing and managing budgets, 2) managing debt and getting out of credit card debt, and 3) building savings and money management priorities. If you prefer to watch a video on the first two topics, just view this:

__Money is an Enabler__ Money is an enabler. It is not a measure of your greatness as a person. Ever see a gravestone that says, “Wow, sure had a lot of money” or “too bad, had lots of debt.” Unfortunately, in America, money is often viewed as power or a measure of success. No need or time for that thinking. At its core, money helps us take care of our basic needs (food, water, shelter), better manage life’s unforeseen potholes, and can also enable us to go after our dreams and passions as well as help those we love. So, let’s get started. This money management framework is what many good financial planners will use to help their clients. __Budgets – The 50-30-20 Framework (Needs, Wants, and Savings)__ Once you have a job and earn money, it comes down to how you divvy your money up and take control. One of the most accepted frameworks is that 50% of your earnings will go to essential needs (shelter, food, utilities), 30% to wants, and 20% to savings. ![50-30-20 Money Management](//images.ctfassets.net/wsuay9fbp17w/Kp989aWeIRkwPk2ANfNgX/9960a447c7c79025d24ddd5215e5651f/50-30-20-Budget.jpg) __50% of your earnings go towards needs:__ - Housing (rent or mortgage – shouldn’t exceed 30% of your overall earnings) - Utilities (electricity, water, garbage removal) - Groceries - Transportation (needn’t be a car – could be commuter money) - Insurance __30% goes to wants:__ - Dining or ordering out - Entertainment, Cable, Movies,... - Gym, Sports,... - Special clothes, salon,... - Vacations __20% goes to savings (future needs/self):__ - 10-15% retirement - If you have access to a 401(k), at least contribute enough to get the company match - Build to 10-15% of your salary if you are unable to at first - Build up an emergency fund of $1K-$2K and then work to get to 3-6 months of your salary in a savings or money market account so you can better handle a financial shock be it an appliance failure, health need, or a temporary job loss - Save for a property or a car - Education (Your job needs or 529 for college or other general needs for kids) When you are first starting out and/or working to get to a self-sufficient income level, the 20% savings piece may be the toughest to attain. However, you won’t really know until you take a look at the last two to three months of your earnings and spending to see where you stand. Then you need to think about a plan to put you in line. Remember, money management is about simple math. Without this you may be relying on "hope" and that's not a plan. Things don’t tend to just work out. However, if you put a few hours of work in, you can assess and find your opportunities. __Assessing Your Situation__ Go grab your credit card and banking statements and categorize your spending for each month in the 50-30-20 buckets. We suggest you use 15-25 subcategories under each such as Mortgage/Rent, Utilities, Insurance, Entertainment, Ordering/Dining Out, and so on. This may take one to four hours to do the first time depending on your situation. Once you have this pulled together, you will want to ensure you are earning more than you are spending. If not, what adjustments can you make to stop the leakage? Next, you will start working to look for changes to move you towards the 50-30-20 budget. A simple spreadsheet (available free via Google or use Microsoft Excel or Apple's Numbers) is all you need to stay on top of this. If you want more tools, consider Quicken. Once you have this setup, update your tracking once or twice a week (15 minutes should do it) and review and work to stay within this framework. Make sure you do a monthly recap to see how you did and identify what you can manage better. You needn’t be exactly 50/30/20, but you will want to be in the ballpark and think about what changes you can make to get there and stay there. You can do this! We’ll talk about debt and eliminating bad debt in the [next post](https://www.sharebuilder401k.com/blog/how-to-manage-loans-and-credit-cards-successfully/ "How to Manage Loans and Credit Cards Successfully"). *This piece is meant for educational purposes. For advice for your specific needs, you may want to meet with a tax, legal, and/or financial advisor.*

How Small Business Can Manage Cash Flow and Fight to Survive

This video and blog offer insights on moves a small business owner can make to fight to survive the crippling economic impact of COVID-19. Accessing the SBA Loan known as the Paycheck Protection Program is a must for any small business in dire straits. There are additional, more immediate moves you can make to improve your cash position. The CARES Act allows for added access to retirement monies that you could consider as a last resort.

For information on the [Paycheck Protection Program visit the SBA site](https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp "SBA Paycheck Protection Program URL Link"). SBA is planning to allow for applications as early as today (Friday, April 3rd). For details on who and how you may be able to gain early access to your retirement accounts via the CARES Act rules, please [view our last blog and video](https://www.sharebuilder401k.com/blog/can-i-access-my-401k-or-ira-money-and-what-are-the-CARES-Act-options "Can I Access My 401(k) or IRA Money and What Are the Added Options under the CARES Act?"). Finally, if you do have a 401(k) plan and need to adjust, stop or suspend your employer match, here are important items to know: 1. If you offer a 401(k) plan with the [Safe Harbor provision](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k "Safe Harbor 401k Information and Explanation"), you may suspend the match. If you do so, you are still required to fund to the required amount by the end of your fiscal year. 2. You could choose to remove the Safe Harbor provision altogether. This requires a 30-day notice. You may not add the Safe Harbor provision back to your plan until next year. Your plan will become subject to testing, and this can impact how much highly compensated employees may put into their personal 401(k) accounts. We do suggest discussing tactics with your provider to help ensure your plan passes testing. 3. If your plan is not Safe Harbor and you are providing an employer contribution or match, you may of course lower or remove this amount. A 30-day notice is typically required. You are probably familiar with the ADP/ACP/Top Heavy tests and may need to consider additional ways to best manage and pass the tests if you make adjustments. We hope this finds you well.

How much to save for retirement?

This is a question many Americans wrestle with and one we work to help folks with all the time. While everyone hopes for Social Security to help, if current [Social Security](https://www.cbpp.org/research/social-security/what-the-2020-trustees-report-shows-about-social-security "What the 2020 Trustees’ Report Shows About Social Security") projections don't change, it won’t payout 100% of benefits by 2035. And of course [healthcare rates rise](https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/moderate-cost-increases-projected-for-health-benefits-in-2021.aspx "Moderate healthcare cost increases expected for 2021") each year, there’s often some unexpected expense and so on. It may seem like you can never save enough. Know this – you can do it. Here’s the thing, you can control a lot to get yourself in position to retire. It doesn’t happen overnight, but if you get some good insights and put them to work, you may just retire very happy. __So How Much Should I Save of My Salary?__ While the answer of how much to save varies by person, in general, you need to save 10%-15% of your income over a 40-year career to live at your standard of living. The general goal is to get to 10x of your salary at retirement age of 67. Don’t stress if you didn’t start saving as a 22 year old. Many people don't because they were earning too little, didn’t know to do so, or other life obstacles got in the way. The important thing is to start planning to save more as soon as you can, and then think about other things you can control that put you in much better shape for financial security at retirement. You will want to save in a tax advantaged account like your 401(k) or start an IRA. These can help your monies grow without the friction of taxes and potentially lower brokerage costs. These account types also have restrictions and/or disincentives for you to be tempted to withdraw the money early. __Assess Where You Are__ Regardless if you are saving or not, how do you know if you are on track or what to shoot for? There are some general guideposts to help you think about if you need to be more or less aggressive. Again, this is just to give you an idea of where you are on the road: | Your Age | Amount Saved for Retirement| | | ----------------------------------- | -- | -- | | 30 | 1x Salary | | 40 | 3x Salary | | 50 | 6x Salary | | 60 | 8x Salary | | 67 | 10x Salary | You can also run different scenarios with this [savings calculator](https://www.sharebuilder401k.com/help/savings-calculator "Savings Calculator to Help Plan for Retirement") which also shows you how long your money might last. __Moves You Can Make to Help You Build Wealth__ There are many moves you can make to help build a meaningful retirement nest egg and we hope achieve financial independence! Below are things you can do starting with your retirement accounts and diving into budgets and major expense management: 1. If you have a 401(k), can you get to 10%-15% of salary now towards retirement? Even if you are unable to, what about 1% more? Then each year you receive a raise, give your 401(k) a raise too of 1-2 % until you get there. 2. If your company provides a 401(k) match, make sure you are getting the full amount and know that this amount counts towards your 10-15% of salary goal as well. So if you contribute 7% of your salary to your 401(k), and your company is adding 4% more with a match, you are saving 11% of your salary. 3. Are you over 50 years of age? 401(k)s and IRAs have “catch-up” contributions that enable you to put more into your account. For a 401(k), the contribution limit is currenty $19,500 per year and with catch up of $6,500, this increases to $26,000. For IRAs, it’s $6,000 per year and with the added $1,000 in catch up contributions, it’s $7,000. 4. Never been a good budgeter or want to know best practices, read our blog on the [50-30-20 budget and steps to take control of your financial life](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart "How to Budget and Manage Your Money Smart"). This may free up more money for both now and for retirement. 5. Are you willing to make some big changes at retirement or even now? Downsizing your house can be a win if you make money on the sale and/or lower your monthly payments. Don’t have a house, what about finding a place with lower rent? What about your car payments -- can these be lowered? You can get there. Good information, some planning, smart money management moves, and you’ll be on the road to financial freedom. *Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.*

The Pros and Cons of Rolling an IRA or “Old 401k” into Your 401(k) Account

When you leave a job, you’re not only leaving your desk, co-workers and old responsibilities behind—oftentimes you’re leaving something else of high value. We’re talking about your 401(k). And when you leave behind your 401(k), you often become less involved with it. That means you probably won’t be as informed about plan, investment or expense changes, or worse, you may forget who the 401(k) provider is and your employer is no longer even around to help you track it down. And the longer you’re away from your old company, the more removed you are from these important facets of managing the retirement money you’ve worked so hard to save. While much of the industry is focused on getting you to roll your old 401(k) into an IRA, and many of us have, is that the best thing? Let’s consider some the pros and cons so you can make the best decision for you. __The Pros of Rolling IRAs and Old 401(K)S to Your Active 401(K) Account__ __1. One Account Is So Much Easier to Manage and Simplifies Your Money Management__ When you have multiple retirement accounts, you have several logins to remember and phone numbers to call if you need help, and all of your important info is in various places. Managing how you have your money invested in stocks and bonds becomes cumbersome across accounts and can make it difficult to do well. By consolidating your accounts into just one 401(k), you’ll see your retirement savings in one place at a quick glance with one login and phone number to call. And yes, it makes managing your asset allocation easier than ever, as opposed to trying to do it across multiple providers and accounts. __2. Some 401(k) Plans Offer Low-Cost Investments__ Consolidating your retirement accounts into a 401(k) account that implements an index fund solution and/or has access to institutional funds will likely also help keep your investment costs lower—and every dollar paid in investment expenses is one less dollar invested in the markets. In fact, paying just 1% more in fund and investment expenses [can cost you hundreds of thousands in savings](https://www.sharebuilder401k.com/why/index-fund-advantage "Index fund advantages -- historic cost and performance overview") over a 40-year career. An index fund is a type of hands-off ETF or mutual fund that tracks a particular benchmark financial index, such as the S&P 500, Nasdaq or the Down Jones Industrial Average. In fact, it’s designed to mimic the performance of these market indexes. It’s a passive way to invest—and it’s this passivity that help give them a cost advantage over actively managed funds. Plus, index funds have historically outperformed actively managed funds. While there are no guarantees about the future, across major asset categories, the benchmark indexes have [historically beaten 78% to 97% of actively managed mutual](https://www.sharebuilder401k.com/why/index-fund-advantage "Index fund advantages -- historic cost and performance overview") funds over a ten-year period of time. Do know that some 401(k) plans offer more expensive fund options, and therefore, these would not offer a cost advantage for you. If you see most fund expense ratios are over 1% in your 401(k), you can roll into an IRA and select lower expense index funds on your own. __3. Your 401(k) Money Is Protected from Creditors and Bankruptcy__ The money you have in your [401(k)s has protections against creditors](https://www.sharebuilder401k.com/blog/are-401k-monies-protected-from-creditors-and-bankruptcy "How 401k plans can protect your money from creditors and bankruptcy") that IRAs don’t provide, including in bankruptcy, as well as against claims from creditors. IRAs are protected in bankruptcy up to a limit of $1,362,800 across all plans based on a government calculation. However, protections may vary from state to state. __4. Access to Your Money Via a 401(k) Loan in Case of Emergency__ While you should look at this only as an [emergency option](https://medium.com/@stuartrr/401-k-loans-the-good-the-bad-and-the-bottom-line-6517b5dd1858 "The good and bad of 401k loans"), many companies allow loans in their 401(k) plan. If yours does, you can receive a loan for half your vested balance up to the $50,000 limit and then pay yourself back into your 401(k). Note that this will likely hurt your nest egg and if you lose or switch employers, the outstanding balance is typically due quickly and you could be stuck with a tax penalty if you are under 59 ½ years of age. __5. You Can Put Off Distributions Longer If You Work Past 72 Years of Age__ With the SECURE ACT of 2020, a traditional IRA requires minimum distributions to begin at age 72. So does a 401(k). However, if you’re still working, you can postpone distributions from a 401(k) until you retire which can be well past the age of 72. __The Cons, Or Why You May Prefer to Roll an Old 401(k) into an IRA__ Sometimes, rolling your old 401(k) into an IRA instead of an active 401(k) can make more sense for you. Yes, you’ll have an extra an account to manage, but costs and other consideration might make this the right call. __1. More, Better or Preferred Investment Options__ Most 401(k) plans keep a set line-up of funds, model portfolios and/or target date funds. This can be a good thing as 401(k)s are focused on retirement appropriate investments. Yet, if your current 401(k)'s line-up is lacking for some important needs you have, or if you’re a more seasoned investor and are comfortable investing on your own, many IRA providers will enable you to invest as you choose in individual stocks, as well as other equity and bond funds and more. __2. Your 401(k) Has High Expense Fund Options__ While we'd like to think most 401(k)s have cost advantages over an IRA, some just don't. Your 401(k) may not offer low-expense index or other low-cost fund options. As mentioned previously, if most of the fund expense ratios are over 1% in your 401(k)’s investment offering, you can find lower expense funds via an IRA. No matter what, keep track of your money. That's typically easier to manage in one or two retirement accounts, so don’t leave that old 401(k) behind. Take the time to move it into your current 401(k) or an IRA so you can best manage it, keep costs low, and build up the best nest egg possible for yourself.

The Big Three Myths Stopping Small Businesses from Adding 401k Benefits

Small businesses employ greater than 47% of U.S. private sector workers and are a major part of our nation’s economic engine. Unlike the businesses with over 500 employees that provide retirement benefits, the vast majority of small businesses do not offer a 401(k). In fact, our latest research* on businesses with less than 50 employees shows that only about 26% offer a 401(k) plan. While we know many American workers are not saving enough for retirement, the research also shows many small business owners are in the same boat as their employees (37% aren’t confident they are saving enough for retirement and 38% are only somewhat confident). And while there are [great reasons for small businesses](https://www.sharebuilder401k.com/blog/seven-reasons-to-start-a-401-k-plan-for-your-business-this-year/ "7 reasons to start a 401k plan for your business") to start a retirement plan, myths are the biggest blockers. The following are three of the most-commonly cited myths from our research to know along with the real facts. ![3 top reasons small business don't offer 401k plans](//images.ctfassets.net/wsuay9fbp17w/29epDL8Xd4SSJ4tEGLTTif/b717462a02ee6b9947c24eca22606386/Why_Small_Business_Don-t_Offer_401ks_1_-_1200x628.png) __1. Our business is too small to offer a 401(k) plan.__ Myth buster: any size business including a [self-employed person](https://www.sharebuilder401k.com/products-pricing/solo-401k/ "Solo 401k Plan Information and FAQs") can offer a 401(k) plan. The fact is 401(k) plans offer big benefits no matter the size of the business. High contribution limits, tax benefits, emergency access to funds through a loan, Roth 401(k) options, and other opportunities and benefits can make a big difference for even the smallest business. __2. I shouldn’t offer a plan because we can’t afford to match contributions.__ Myth buster: Matching is not required by businesses offering a 401(k) plan, and the business (and their employees) can still reap many benefits without a match. An employer is not required to contribute a penny to employees’ accounts. Still, there are many mutually beneficial reasons for owners to offer a match or profit sharing to their employees. Also, [employer 401(k) contributions are tax deductible ](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax/ "Matching isn't required and it can be 100% tax deductible")for the firm. It’s more of a cash flow consideration for the business on whether to offer a match or not. __3. 401(k) plans are too expensive to setup and manage.__ Myth Buster: There are low-cost solutions and providers that specialize in servicing small businesses — and that do a good job. For example, a business of 10 employees can pay less than $100 per month in administrative, plus these costs are tax deductible for the firm. If it’s the first plan for the business, and it has 1-100 employees, the company qualifies for [tax credits of up to $5,000 per year](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k/ "Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years") for the first three years of the plan. The best plan providers will control the costs paid from employees’ account balances and keep investment expenses under one percent all-in (fund expense ratios, recordkeeping, asset management, etc.) This is a good benchmark to consider as there is really no reason to pay more than one percent. When you dispel these myths, it’s much easier to see how any size business with about any size budget can offer a 401(k) plan and help more Americans get on track for retirement. *METHODOLOGICAL NOTES. *The ShareBuilder 401k Small Business Retirement Survey was conducted by Wakefield Research (www.wakefieldresearch.com) among 500 U.S. Small Business Owners at companies of 1-50 employees, between March 25th and March 31st, 2022, using an email invitation and an online survey. ShareBuilder 401k has fielded regular research on the small business marketplace since 2006. Results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of interviews and the level of the percentages expressing the results. For the interviews conducted in this study, the chances are 95 in 100 that a survey result does not vary, plus or minus, by more than 4.4 percentage points from the result that would be obtained if interviews had been conducted with all persons in the universe represented by the sample.*

Solo 401k plan 2019 deadline

There is an important deadline for owner-only businesses that want to save on taxes this year and/or want to set money aside for retirement. Solo 401k plans, also called Individual 401k plans, enable owners to tax-defer up to $56,000 in taxes for 2019 or $62,000 if you are at least 50 years of age. This can be a significant tax savings for this year to the tune of [$10,000 or more](https://www.sharebuilder401k.com/products-pricing/solo-401k "Solo 401k Savings Limits and Tax Saving Example") for some. __Purchase a Plan by 12/30 to Have Until Your 4/15 Tax Deadline to Save on 2019 Taxes__ Solo 401ks, which are for the self-employed or any multiple owner business that does not have any employees, must be setup by December 31, 2019 to receive tax benefits. The good news is that you’ll have until your tax filing deadline (April 15, 2020 for most business types) to make profit sharing contributions into your 401(k) and still receive the tax benefits for 2019. You can purchase and complete the online setup by December 30th and still qualify. If you buy by December 20th you can take advantage of ShareBuilder 401k’s [free setup promotion](https://portal.sharebuilder401k.com/ "Get ShareBuilder 401k Plan Pricing"). __You’ll Have Access to Roth 401(k) and Loan Options Too__ Individual 401k plans also allow you to make Roth contributions during the calendar year, but Roth contributions are not valid for the previous year if made post December 31st. In case of an emergency, your 401k enables a loan option that allows you to access half of your money up to $50,000 penalty-free, and you pay it back to yourself over time. For a summary of a Solo 401(k) plan benefits, just [visit our Solo 401k product page](https://www.sharebuilder401k.com/products-pricing/solo-401k "Solo 401k plan product page"). Paying yourself first with a Solo 401k is a great way to receive a gift that can keep on giving for years to come. Happy Saving This Holiday Season!

Small Business Assistance Resources

Many businesses do and will need economic help as we work through these unprecedented times of COVID-19 and social distancing. To help small businesses (and midsize for that matter) find resources that may help your business, here is a current list of options and programs you may be able to take advantage of right now: 1. SBA Disaster Loans – up to $2M at 3.75%, 30-year term. This requires your state's governor to request disaster designation from the federal government. This is happening daily and will be broadly available. If your state has, you can apply here: [https://disasterloan.sba.gov/ela/](https://disasterloan.sba.gov/ela/ "SBA Disaster Loan Assistance") (FYI, SBA loans may be available to firms with 1 to under 1,500 employees). 2. Standard SBA 7a Loans - up to $5M. This expected to increase with the stimulus package that we expect to pass Congress shortly. Most big banks do SBA loans, or you may want to use [LenderMatch](https://www.sba.gov/funding-programs/loans/lender-match "SBA Lender Match Services"). 3. Some banks are offering forbearance and aid programs. This is evolving quickly. There's a [list here](https://www.forbes.com/sites/advisor/2020/03/12/list-of-banks-offering-relief-to-customers-affected-by-coronavirus/#450e8e2c3ee3 "List of bank assistance programs published by Forbes") that Forbes is updating regularly. In addition, if you use American Express Business – they have a program that allows their customers to delay up to 2 months of payments, interest-free. Just call American Express’ customer service and ask. __Other Ideas Your Business May Consider to Improve Your Cash Position__ There are other methods you may be able to improve you cash position including: - Existing vendors are an amazing source of credit. They know you and your business already. Many may allow you to delay payment if you ask. Perhaps request changing that Net 30 to Net 90 terms. Include your landlord in this discussion as this is often a significant monthly payment. Maintaining strong Cash flow is super important. - If you have clients that are faring well, ask if they will pay bills early. Perhaps offer a 1-2% discount if they speed payment. - If you have a 401(k) plan, you can suspend your match and reinstate it when your business is back up and running at full steam again. Also remember that tax deadlines have been extended to July 15th for most in case you owe. __What is Expected in the Government Business Stimulus Package for Small Businesses__ While this is not final as of the writing of this post, here is what is currently expected to be in this legislation: - $350 to $367 billion in aid for small businesses — This would come in the form of loans with the goal to keep Americans on payrolls as economic activity has come to a standstill for many. Under the proposed program, loan money that small businesses use to cover payroll, rent, mortgage obligations, and utilities will be forgiven. The legislation is also expected to provide billions in debt relief on existing loans. - Paid sick leave and family leave – Small businesses will be required to provide leave and will be reimbursed by the government. This will likely mean that 2 weeks paid sick leave is offered at full salary up to $511 per day, and up to 12 weeks paid family leave at 2/3rds salary—up to $200 per day for both full-time and part-time workers. - $600 per week in self-employment unemployment insurance — For the first time, self-employed individuals will qualify and there will be $600 additional self-employment insurance for those who already qualify. This stimulus can make a difference for many businesses to survive. Also know that these programs can take time to setup and payout. Do think through how to manage the amount of time it may take to receive payment if you decide to take advantage of any of these programs or are impacted by the paid leave provision. Wishing you well. *This is not tax or legal advice. Please consult your specialist for what is right for your business situation.*

Should ESG Funds Be a Part of Your 401k Investing Strategy?

ShareBuilder 401k recently added Environmental, Social, Governance (ESG) funds) to the [401(k) line-up](https://www.sharebuilder401k.com/services-investments/etf-lineup/ "ShareBuilder 401k Investment Roster and Information") as investment options for our customers. There has been a lot of discussion about ESGs, and here’s some perspective to consider if these types of investments are a good fit for your own portfolio or not. __What Makes a Fund an ESG?__ Investopedia provides a [nice summary](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp "Environmental, Social, and Governance (ESG) Criteria"): *ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.* There can be a bit of subjectivity here like there can be in most any asset class but know that a fund or index will typically work to focus on one of these three categories to define companies that meet the criteria for it to be included in the fund. For example, an environmental fund often might include companies that are developing technology or products to reduce fossil fuels and carbon emissions – think electric cars, solar power, batteries that can store electricity for longer and longer periods of time, etc. It might also include clean water focused companies and many more. Many ESGs work to focus on excluding those companies that do not meet the criteria. These funds are typically equity (stock) investments, and they will fit or be a subset within a larger [asset class](https://www.sharebuilder401k.com/help/glossary "Investment term glossary") such as Large Cap Blend. The S&P 500 would fall in this asset class if this feels like we’re speaking Latin. We classify ESGs in our Specialty Fund list for our customers to consider. __How Do ESGs Funds Stack Up to Non-ESG Funds?__ A loaded question, but like in every asset class, we would consider a lot of the ESG options subpar. For any new fund in any asset class, the fund may lack size to know if it will survive, may have high expenses, may not be well diversified, may not have a track record of performance near its benchmark or comparable asset class, an undefined or poorly defined benchmark, etc. It’s just important to know that you need to carefully review a fund before you buy it no matter the asset class to try to ensure it’s a fund that will be around and perform in line with its index. Also, at ShareBuilder 401k we [employ a proprietary method](https://www.sharebuilder401k.com/services-investments/investment-philosophy/ "ShareBuilder 401k Investment Management Expertise and Philosophy") and parameters to review every fund made available in our investment roster to ensure it meets a high bar. __The good news__ is there are now a few ESGs that have risen to the top like the ones we just added to our fund line-up. As one proof point, while we all know there is no guarantee of future performance with any investment, when you look at these [ESG funds we added versus other large-cap blend](https://www.sharebuilder401k.com/services-investments/etf-lineup "The ShareBuilder 401k ETF Lineup and Information") indexes such as the S&P 500 over various time periods, you see they are right in line and even better in some periods. __Will These Funds Be Good Investments?__ Markets are [volatile](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down/ "Do I Adjust My 401(k) When Markets Are Down?"). Some asset classes are counter cyclical. Some never perform as well as others. Some perform better than others. And the list goes on. Its why financial companies can never guarantee performance and another reason of [why it’s important to diversify your investment](https://www.sharebuilder401k.com/blog/how-much-you-put-in-stocks-bonds-and-cash-is-a-big-deal-for-your-401k-savings "How much you put in stocks, bonds, and cash is a big deal for your 401k savings") selections. ESGs are a growing area of interest and in particular some parts like new energy are seeing innovation. This is one reason among others we’ve highlighted that this sector has the potential to be an investment area to consider as part of your portfolio. Time will tell. Of course, again we suggest you need to invest in other funds that cover other equity and bond asset classes beyond ESGs to build your portfolio. Lastly, think through your [investment needs](https://www.sharebuilder401k.com/blog/how-to-select-funds-in-your-401k-plan "How to select funds in your 401k plan"), risk tolerance, and goals and determine if you want to allocate some percent or amount of your portfolio to ESGs. We hope this helped you think through if ESGs are right for you.

Seven Reasons to Start a 401k plan for Your Business This Year

If your business is on solid ground, now is the time to offer yourself and your employees one of the most powerful, if not the most powerful, way to save tax deferred. That of course is a 401(k) plan. Any size business can offer a 401(k) plan, be it you're a self-employed, one-person shop or a business of a few or many employees. So here are seven compelling reasons to take action and start a 401(k) plan for you and your business: 1. You can protect up to [$61,000 a year in a 401(k)](https://www.sharebuilder401k.com/blog/2022-401k-contribution-limits-ira-and-roth-limits-and-more/ "2022 401k and IRA contribution limits") plan tax-deferred ($67,500 if over 50) -- that’s a lot of mullah. This amount is inclusive of personal contributions and employer contributions as applicable. 2. You can personally contribute up to $20,500 ($27,000 if over 50) tax-deferred to lower this year’s taxes, or choose to contribute after-tax in a [Roth 401(k)](https://www.sharebuilder401k.com/blog/roth-401k-meet-roth-iras-more-versatile-big-brother "Differences between a Roth 401(k) and Roth IRA") without any limits based on your income (unlike a Roth IRA). Roth savings are tax-free upon reaching retirement age, earnings and all. 3. Contributing to your personal 401(k) account over a career [may just make you a multi-millionaire](https://www.sharebuilder401k.com/blog/million-dollar-reason-to-start-a-401k-plan-for-your-small-business "saving regularly in a 401(k) over a career can build to millions of dollars in savings"), so you can take great care of loved ones, pursue other dreams and live well in retirement. 4. The price for 401(k) plans are affordable for any size company thanks to providers that use online technologies and [index funds](https://www.sharebuilder401k.com/why/index-fund-advantage "how index funds lower investing costs and can help you save more") to take the cost out of retirement plans. 5. The business and personal tax benefits of 401(k)s can outweigh the actual administrative costs of offering a retirement benefits for your business. Businesses with 1-100 employees starting their first 401(k) plan can [qualify for up to $5,000 in tax credits](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k "Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years") each year for the first three years of the plan. 6. If you need access to your money in an emergency, a 401(k) plan offers a loan option that allows for up to $50,000 to be loaned out to yourself from your vested 401(k) account savings. It’s penalty free access to your 401(k) money if this is ever something you need to consider, and you pay it back to yourself in your 401(k) account over time. There are [risks to consider with a 401(k) loan](https://medium.com/@stuartrr/401-k-loans-the-good-the-bad-and-the-bottom-line-6517b5dd1858 "The good and bad of 401k loans") to be aware. 7. Your money in a 401(k) is typically [protected from creditors or bankruptcy](https://www.sharebuilder401k.com/blog/are-401k-monies-protected-from-creditors-and-bankruptcy "How 401k plans can protect your money from creditors and bankruptcy"). While we all hope we are never in this kind of financial position, knowing this can provide some comfort during uncertain times. Wishing you a healthy and prosperous year. *This article was updated with 2022 contribution limit and applicable figures.*

SEP IRA vs. 401k – What’s the Difference?

If you’re thinking about starting a retirement plan for your business, you probably have heard of [401k plans](https://www.sharebuilder401k.com/blog/what-is-a-401k-and-why-get-one/ "What is a 401k and why get one"), and perhaps you’ve heard of the SEP IRA too. So, what are these plans and how might a business choose one over the other? Let’s dive in and look at both options. __What is a SEP IRA?__ SEP stands for Simplified Employee Pension, and this type of retirement plan enables employers to make optional contributions on a tax-deferred basis. When contributions are made, they must be disbersed to all eligible employees, and only the employer can contribute to the plan. Whether you’re self-employed or have employees, a SEP IRA is something you can consider. In determining the company contributions, you can include up to 25% of the employee’s total compensation not to exceed the annual limit (which is $58,000 for the 2021 tax year). The SEP IRA has less options than a 401k but can be a little easier to administer. If your business income is unpredictable, the SEP IRA contributions are optional each year, so it can be a good fit. Do know that 401k’s allow for optional employer contributions too. You will just need to ensure you setup a plan design that enables optional employer contributions. This is typically done via a 401k profit share. And unlike a SEP IRA, employees can contribute to the 401k regardless of whether the employer provides any contributions each year or not. __Why choose a 401k?__ While the SEP IRA can be a good option for some businesses, it does lack some compelling features that are common to the 401k. It’s one reason 401ks tend to be better known and popular. These include the ability to contribute as both an employee and employer, catch up contributions for those 50 years of age or more, [Roth 401k](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/ "Roth 401k or regular contributions -- which is best for you?") option, [loan option](https://www.sharebuilder401k.com/blog/401k-loans-the-good-the-bad-and-the-ugly/ "401k loan pros and cons"), and vesting options. This can be beneficial to you and can help attract and retain employees. Plus, personal contributions can help any employee better manage their taxes each year while saving for retirement. Here are the major differences at a glance: | __Feature Comparison__ | __SEP IRA__ | __401k__| | ------------ | :----------: | :----------: | | Employee contributions allowed?| No | Yes, up to $19,500 per year in 2021 | | Catch-up contributions allowed?| No | Yes, an additional $6,500 for those over age 50 in 2021| | Employer contributions required?| No | Optional – dependent on the plan design you choose| | Roth contributions allowed?| No | Yes, plus no income restrictions| | Loans allowed?| No | Yes | | Vesting options available?| No | Yes | | Employer contribution limits?| Up to 25% of net income, not to exceed the overall annual limit ($58,000 in 2021)| Up to 25% of net income, not to exceed the overall annual limit ($58,000 or $64,500 for those over age 50 leveraging catch up contribution)| The employee contribution option provides additional flexibility for self-employed individuals choosing a solo 401k, since they too have the option to contribute as both the employer and employee of their own business. Businesses with employees can choose between a Traditional 401k or [Safe Harbor 401k plan](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "Safe Harbor 401(k) Plans – More Savings, Less Hassle") depending on their business needs, and this offers additional customization whether choosing to match employee contributions and/or select employee vesting schedules. In general, 401ks are going to give you more options than a SEP IRA, and both offer high contribution limits. Happy saving.

Roth 401k or Regular 401k – Which Is Best for You?

When 401ks came into being, all contributions were made tax-deferred. So, you don’t pay taxes today on the money you put into your 401k account each payroll. This can allow you keep more of your take home pay while you save for tomorrow. Your 401k savings will be taxed when you withdraw it in retirement. Now, most 401k plans also offer a Roth 401k option. This is the exact opposite of tax-deferred. You make your contributions on an after-tax basis. By contributing some or all of your funds to the Roth, you pay taxes now, but these monies are not taxed again when you use them in retirement — earnings and all. Some like to call this retiring tax-free. See the chart below. Fun Facts: If you receive an employer match, this money is required to be paid into your account tax-deferred. However, you as an employee can choose to contribute all tax-deferred, all Roth, or you can actually contribute to both! __Roth 401k versus Traditional 401k__ | | Roth 401k | Traditional 401k (tax-deferred) | | ------------ | :----------: | :----------: | | Contribution Tax Treatment| You contribute after-taxes; there is no tax benefit in the current year. | You contribute before tax which lowers your current adjusted gross income. You’ll have more take home pay in the current tax year than if you made all Roth 401k contributions. | | Withdrawal Tax Treatment| No taxes on your distributions in retirement. To be IRS qualified, you must have established the Roth 401k 5 or more years ago and you are taking the distribution on or after reaching age 59 ½ or due to disability or death.| Your distributions are taxed as ordinary income upon reaching retirement age (59 ½ years old). Note that if you take withdrawal before retirement age you will typically be subject to an added 10% penalty.| *Note that[ Roth 401(k) contribution limits are much higher than a Roth IRA](https://www.sharebuilder401k.com/blog/roth-401k-meet-roth-iras-more-versatile-big-brother/ "Roth 401(k) and how it has more advantages than a Roth IRA") and there are no income limits to use it.* __Which Do I Choose?__ Here are your top considerations that make this easy for you (go through all of these before you make a call as you will likely find multiple needs with different answers): - I want or need to lower this year’s taxes and maximize today’s take home pay while saving for retirement = Tax-deferred - I am just starting to climb the career ladder and expect to be at a higher tax rate in retirement = Roth - I don’t expect to be in a higher tax rate come retirement; in fact, my rate may be lower = Tax-deferred - I expect tax rates to be considerably more in retirement in general = Roth - I want flexibility to manage taxes in retirement = Roth - I expect to have wealth and will pass money on to heirs = Roth (You can roll your Roth 401k into a Roth IRA and pass to heirs with less tax consequences for them) __More Perspective – You May Want to Hedge Your Bets__ No one knows what tax rates will look like 10, 20 or 30 years from now, and there is no guarantee on where you will be on your road to financial freedom. The Roth option can be used to hedge your tax situation when you’re ready to use your money in retirement. A common strategy is to divide your contributions between pre-tax and Roth. This allows you to “hedge your bets” and provides you an extra option on how to use your savings when you reach retirement age. For instance, you can take money out of the Roth portion of your account in years when you need to spend more money (maybe a big trip or moving to that dream house on the beach) to keep taxes in check and use the traditional 401k monies at times when your spending will be lower. Remember that all employer matching and profit-sharing is done on a tax-deferred basis. This means that only your personal contributions can be made towards a Roth 401k account. So, if you are hedging, you may want to consider how much you receive from your employer to determine what percent you want to contribute to Roth vs. tax-deferred to meet your goals. As you look for new ways to pay yourself more and keep taxes in check, know that your 401k can be a big help. To ensure maximum tax benefits, the earlier you start the better. The [savings benefits might just last you a lifetime](https://www.sharebuilder401k.com/blog/what-is-compounding-and-how-it-helps-your-money-grow/ "How investment compounding helps your money grow over time"). It’s always wise to check with your tax advisor for more insights and strategies for your specific situation.

Five Things Your 401k Provider Probably Prefers You Don’t Know

Any size business can offer powerful 401(k) benefits, but as with most things, the better informed you are, the better decisions you can make. And this adage is never truer than when it comes to your money. While a good 401(k) plan can have a positive impact on a business and its individual employees, there are also some significant landmines to watch out for when evaluating and choosing a provider. Whether it’s unclear or hidden costs, undue risks put upon an employer or just smart investments to add to a 401(k) portfolio, what works for the provider doesn’t always work best for the employer and the employees. Read on for the top 5 things to know when it comes to your 401(k) plan. __1. Fund Expenses Matter a Lot – Review Them and Keep Them Under 1%!__ Most people are aware that there are certain 401(k) expenses that they need to pay. While the costs paid by the employer to administer the plan often gets the focus, probably the bigger need is to check out what all employees, including the owner will pay in investment expenses. Investment expenses typically include fund expense ratios, advisory, recordkeeping, administration and/or trustee expenses. Fund expense ratios are often the biggest expense of these. So you know, employees in small- and mid-size company plans are often subjected to paying 1.5% to 3% in fees annually on their 401(k) account balances. It may not sound like a lot, but over a career this can literally cost each employee hundreds of thousands of dollars.

Paying 1% Less Can Make a Big Difference!

This example shows the effect that expenses can have on your 401(k) retirement account over a career of 40 years by comparing the costs of paying 1% versus 2% on investments and how savings may accumulate. It assumes the investments have a fixed annual 7% return before expenses with no distribution or tax considerations and does not imply future returns. The example assumes each employee has a salary of $75,000 in year one and receives a 3% merit raise each year on-going. In addition, the employee contributes 5% of her salary each year and receives a 3% of salary company matching contribution.

The reality is, there’s no need for fees to exceed 1% all in, regardless of the size of your company or your plan’s asset balance. There are providers out there that offer low-cost plans and service. And, to re-emphasize, by staying below the 1% threshold, employees can accumulate tens, if not hundreds of thousands, dollars more savings over a thirty- or forty-year career. __2. Index-based Funds Have Historically Beat Actively Managed Funds, so Why Are Most 401(k) Plans Chalk Full of Actively Managed Funds?__ Piling on point #1, Most 401(k) plans are built with actively managed mutual funds as a large component, but actively managed funds have a ton of costs associated with them: research that needs to be done, the costs of trading stocks and bonds within the fund, there are manpower hours, and even marketing costs that are passed through via 12b-1 fees, or worse, front- or back-end loads. It’s not uncommon for your provider to be paid with revenue sharing from actively managed funds. With each extra dollar of expense incurred, the fund still has to overcome these expenses to outperform its benchmark index (usually the success measure of the fund). Index funds don’t have these loads or revenue sharing nor all the research costs and why they tend to have significantly lower expense ratios than actively managed funds. Considering this, it makes sense that historically the vast majority of actively managed funds have failed to beat their index over a 5-year period and even fewer over 10 years.

10-Year Performance of Actively Managed Funds Versus Benchmark Indices

| Fund Category | Comparison Index | Percent of Funds Underforming Index^* | | ------------- | ---------------- | ----------------------------------------------- | | Large-Cap Core | S&P 500 | 97.38% | | Mid-Cap Core | S&P Mid-Cap 400 | 92.03% | | Small-Cap Core | S&P Small-Cap 600 | 96.72% | | International | S&P 700 | 77.78% |

^*Source: SPIVA (Standard & Poor's Indices Versus Active Funds) U.S. Scorecard, End of Year 2019, S&P Dow Jones Indices.

While a provider may be better compensated with actively managed funds, you aren’t. Every dollar in expense is one less dollar in the markets to help your money grow. In the same vein, some 401(k) plans also include variable annuities, but in reality, they add little or no value over other options when building for retirement. Annuities could make sense as part of your portfolio, and maybe more so after retirement, but not in your 401(k). The costs and issues in managing the plan in your employees’ best interest far outweigh the need for providing annuities in a company’s retirement plan. They’re expensive, typically charging 1.25% to 1.60% mortality and expense fees on top of the fund expense ratios. The participant can expect to pay >2% for annuity products. __3. You Have All the Risk on Your Shoulders, and Your Provider Probably Doesn’t__ When you provide 401(k) benefits as an employer, you have a duty to run the plan in the best interest of your employees. Those duties include monitoring investment options made available, making changes as appropriate, providing guidance materials to members of the plan, and more. But while 401(k) providers often give employers a list of funds from which to select their company’s fund line-up, many won’t actually shoulder the responsibility for them. That means the very investment expertise the rep is supposed to be providing is really fully on the employer. And if employees complain or the business owner is audited, the responsibility falls solely on the employer to correct any issues. Additionally, many providers offer their own funds or insurance annuity products within the 401(k) products they sell. This makes it difficult for them to take an unbiased approach in providing the best investment options for their customers. Using an independent investment advisor that can take an objective look at all the offerings on the market and select high quality funds by asset category may offer some solid upside compared to a biased fund line-up. So how can you solve for all of this? Choose a provider that will serve as an [ERISA 3(38) advisor](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles "401(k) provider fiduciary duties and roles") on your plan. These providers share some important fiduciary duties on your plan and will not only take on the burden of managing the fund line-up and ensuring that the investments remain the right ones for a company’s plan, but they’ll also be on the hook for any investment line-up issues that may arise. This can provide a lot of protection and make your plan a whole lot easier to manage. __4. Know the Service (or Lack of Service) You Will Receive__ Some providers offer a decent digital experience, but don’t pick up the phone or respond to you or your employees emails quickly. Some providers are the opposite with a poor digital experience but will take a call. Some don’t offer or will have you pay for employee education meetings, and others don’t even offer a kick-off meeting. You really deserve it all: a low-expense plan that offers service for you and your employees every step of the way. Give our previous blog a read on “[What 401(k) Plan Services Your Business Will Need and Value](https://www.sharebuilder401k.com/blog/what-401k-plan-services-your-business-will-need-and-value "What 401(k) Plan Services Your Business Will Need and Value")” so you are clear on what services you expect and can ask the right questions before you pick your provider. __5. Pricing Won’t Lower Unless You Re-negotiate__ A typical plan will have some admin costs and investment service expenses. Often these costs are set so they are what they are unless you go back and re-negotiate them with your provider. That re-negotiation may require added commitments, so be aware of that. You may want to look for providers that offer [automatic pricing discounts](https://www.sharebuilder401k.com/products-pricing/automatic-pricing "Automatic Pricing Discounts"), so as your plan grows in value, your plan costs lower more. This simplifies the need to be negotiating with your provider, and at the same time, know you are getting fair pricing. Choosing the right retirement plan shouldn’t be hard—and it’s not, if you know what to look out for. Small-and mid-size business employers are simply looking for ways to manage costs and provide a better plan for their employees—but 401(k) plans can be fraught with conflicts of interest that can have a negative effect on their performance and ultimately undermine an employer’s ability to deliver a great plan for their company. Finding the right provider can help avert these issues and even simplify and lower the costs of a 401(k) plan. Focus on investment diversification and keeping fund expenses and participant fees low so your money can work harder and build over time. In the long run, you’ll be glad you did.

What to Know Before Set Up the First 401k Plan for Your Business

So, you’re running your business, and you now have the funding or hit that financial milestone that allows you to add 401(k) benefits for you and your employees. That's awesome! You may have experience with a 401(k) account as an employee when you worked for a different company. Offering a 401(k) plan for your business is quite different. 401(k) plans must be run in the best interest of your employees and requires some decisions on plan design, how to oversee the investment roster, and what services and features can make it as hassle-free as possible for your business while ensuring you receive the tax credits, deductions and saving benefits. There are five main things to ensure you have perspective and then you can get up and running with a plan that meets, and we hope, exceeds your expectations. 1. __Plan Design:__ 401(k) plans have lots of flexibility, features, and options. You’ll want to get familiar with the top plan designs, so you know what’s right for your business. Our web page “[What 401(k) Plan Design is Best for Your Business](https://www.sharebuilder401k.com/overview/best-401k-for-your-business "What 401(k) Plan Design Is Best for Your Business")” provides a nice overview that takes a few minutes to read. 2. __Services:__ You’ll want to be aware of services you’ll want and ensure the provider you are considering delivers. You will need a solid digital experience supported with recordkeeping services required to offer your plan – the table stakes if you will. However, there is more to it than that. Be it quickly answering your employee questions and providing education or investment management oversight and plan compliance support, having an understanding of these items are essential to get what you need. This blog provides a quick overview with a chart of the services to know and what to avoid, “[What 401(k) Plan Services Your Business Will Need and Value](https://www.sharebuilder401k.com/blog/what-401k-plan-services-your-business-will-need-and-value "What 401(k) Plan Services Your Business Will Need and Value").” 3. __Your 401(k) Responsibilities and Risk Management:__ 401(k) plans require business owners and others that help run your 401(k) benefits to take on duties and careful oversight. While many 401(k) providers do not take on a “fiduciary” role to support you and manage the work and risks, some do. This can be great for those that either don’t want to support this internally or are not investment experts. In general, if the provide delivers ERISA 3(38) Advisory services, it can make a lot of this easier. This page provides deeper insights: “[Understanding the Roles of a Fiduciary](https://www.sharebuilder401k.com/help/fiduciary-duties-and-roles "Understanding the Roles of a Fiduciary").” 4. __Pricing:__ You always want to get a great value for your money. Many employers will get focused on the setup and monthly or quarterly admin charge their business will pay. There are several low-cost providers out there now. Make sure they offer the services you want and know that a few hundred dollars difference may not be that big of a deal if the fund expenses in your plan will be over 1% (you want fund expenses well under 1%). The fund expenses and other related investment expenses that each employee pays (including owners) from their account may cost you and your employees a heck of lot more over your career. Read the “[Total Cost of Ownership](https://www.sharebuilder401k.com/products-pricing/total-cost-of-ownership "Total Cost of Ownership of 401(k) Plans")” for a deeper understanding and know what will matter most to you. 5. __Setting Up Your Plan:__ Now you’re ready to get going. What should you expect and what will you need to get up and running? There are really six steps to get your plan in place. This overview will give you good perspective: “[How to Set Up a 401(k) Plan for Your Business](https://www.sharebuilder401k.com/overview/steps-to-setting-up-a-401k "How to Set Up a 401(k) Plan for Your Business").” When you purchase you will need banking information and your EIN. As you install the plan, you will need to have employee info ready to upload. A good provider will hold your hand through a streamlined digital purchase process and get your plan up and running. Lastly, depending on your payroll provider, you may be able to integrate or at minimum do simple uploads each payroll to help put your plan on autopilot. You will also want to be aware of [how 401(k) tax credits and deductions work](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k "New Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years") and make you sure you get them. Businesses of 1-100 employees can qualify for up to $15,000 in tax credits over the first three years of their first plan. [Employer matching](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax "401(k) Matching Isn't Required and It Can Be 100% Tax Deductible") contributions if you offer are often 100% deductible. Have more questions? Just email us at: 401kpros@sb401k.com or give us a call at 1.800.431.7934 option 1. Wishing you great success and happy saving!

COVID-19, Your 401k, and How We’re Supporting You

From everyone at ShareBuilder 401k, we hope you, your friends, family and broader communities are staying safe and healthy through the rapidly evolving COVID-19 situation. __We’re Prepared and Here to Help__ Operating as a nimble fintech since 2005, we pride ourselves on consistently pairing reliable technology with exceptional service – and having the capability to work virtually from anywhere. We built our business by hiring the brightest talent and enabling them with great tools and technology to support customers and innovate through unexpected circumstances like those we’re facing today. Given the current situation, our focus is keeping our team members and their families safe and healthy with remote working, while continuing to provide business owners and their employees with quality service, insights and information they can depend on. __Timely Updates on Market Volatility and Long-Term Savings__ We recently posted [Do I Adjust My 401(k) When Markets Are Down?](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down/ "Do I adjust my 401k investments during market downturns?") to offer an up-to-date perspective on long-term investing and market volatility. If you’re concerned about what to do with your retirement savings, give this a read for examples and perspectives that can help you make informed, rational choices related to your long-term investing strategy. It may also help to look at historical trends as an input to help understand how to navigate today’s uncertain markets. Drops and volatility are unsettling for most of us, but it's important to understand that market cycles, though unique (this one especially) are normal and to be expected -- and having a long-term, well-diversified plan and sticking with it are more important than ever. Take the S&P 500 and how it’s grown since January 2008 (pre-Great Recession) to earlier this week: ![S&P 500 Jan 1, 2008 to Mar 16, 2020](//images.ctfassets.net/wsuay9fbp17w/7g2zup0SRUKTvvgXrkLbMO/8e90aba9ed51316dcbabe5b073eb8d28/S_P_500_Jan_1__2008_to_Mar_16__2020.png) If you’d invested $1,000 at the open on the first market day of January 2008 in a low-cost S&P 500 fund, never invested again, and still hold it today, it would have grown by well over 80 percent. That’s going through the Great Recession, being in the midst of current market turmoil, and excluding dividend gains you could have received. This reinforces the value of having a well-diversified plan and staying invested through market downturns and volatility. Continued market volatility can be expected at this time. Looking out to the future, believing in business ingenuity, the help governments will provide, and the promise of future innovations, these all bode well for stock markets to recover over time. We hope you find this helpful. As we continue connecting with and supporting clients, we’ll post additional perspectives and answers to common questions we’re receiving on our blog and social channels. Stay tuned, stay healthy, stay safe, and stay committed to your long-term financial plan. Note: Markets are unpredictable and may or may not act in the future the way they have in the past. Investing over time does not assure a profit or guarantee against a loss.

Coronavirus and The State of Small Businesses

__Small Businesses Are Disrupted: Here’s What Owners Are Worried About and How They’re Handling It.__ The coronavirus pandemic has forced most small businesses into survival mode, with many putting long-term plans and savings on hold. According to our latest ShareBuilder 401k survey of 500 small business owners (SBOs) fielded March 27 to April 3, 2020, 75% of small business owners are concerned (22% extremely concerned) about the future of their businesses. But there are some who are taking steps to optimize operations and long-term plans in order to protect their workers and pull through. Here’s some insight into their states of mind—and the state of small business—during the time of COVID-19. ![3 out 4 small business owners](//images.ctfassets.net/wsuay9fbp17w/PwjSnvH2DirlIjRkvMPCP/b0705afd3b01b609b954e79aab713276/3outof4businesses.png) Our new research shows that the majority of small business owners expect challenging markets to persist. Plus, many are financially unprepared and have their long-term savings and retirement at stake. __SBOs Expect Market Volatility to Continue__ Given the fast, evolving impact of the pandemic, many are anticipating that they’ll be dealing with the financial market impacts for many months or more to come. A majority of SBOs (54%) think that the current market volatility will last more than 6 months—and more than a third (35%) are predicting that it will last more than a year. ![54% and 35% believe conditions will persist](//images.ctfassets.net/wsuay9fbp17w/aA1CfgyfzJguiwO8WHd5h/2984a2d2a901b3dcd0205fd3feab21a1/54___35.png) __SBOs Have Prioritized How to Cut Costs__ As many small businesses work to survive with much of the nation on virtual lockdown, their plans to pare budgets indicate they’re putting their employees first. SBOs report marketing expenditures (30%) and operating costs (30%) are most likely to be reduced first before they consider cuts to labor and benefits—business hours and workforce (each at 15%) and employee benefits (10%). ![Cutting Costs](//images.ctfassets.net/wsuay9fbp17w/1GfZruJlelP2fiAjWrsXRA/ac06e8389d1c3149c9ebfb9507c5462d/Cost_Cutting.png) __For Small Businesses with 401(k)s, Owners Are Taking Action__ Among the minority of small businesses that offer 401(k) plans, 76% have done or plan to do something with regard to their retirement plan and/or account as a result of current volatility. More than a quarter (27%) of SBOs have or plan to have informal conversations with staff about market volatility, 20% are asking their provider to provide more information or education and 19% will or plan to increase contributions to their own retirement plan. Other are decreasing contributions, suspending their match (9%), and 6% are shopping providers. ![Taking Action with Their 401k](//images.ctfassets.net/wsuay9fbp17w/1RA8UWB3wIuQiyTdmoVauY/543c99044da7b895212f94c191a44c08/76__taking_action.png) __With So Many SBOs Needing Access to Cash, What Are Their Options?__ Nearly half (47%) of SBOs don’t have an emergency fund in place in case of an economic downturn. In addition to limited savings, many SBOs don’t have adequate back up plans in place: ![Lack access to loans or other cash management tools](//images.ctfassets.net/wsuay9fbp17w/5ePoZoieOoY6zPuTUWCNZf/81acb112b69db03a072813237ec17005/Lack_acccess_to_money.png) It’s essential we support small businesses to find relief and survive the near-term, as failure to do so during this pandemic will be compounded by the long-term impacts on Americans’ inability to save for their futures. With more than half of American workers employed by small businesses, we must work to deliver the right tools, information, access and resources necessary for both near-term survival and long-term success. Though ShareBuilder 401k has already published [an inclusive post on how small businesses can manage and access cash during emergencies](https://www.sharebuilder401k.com/blog/how-small-business-can-manage-cash-for-survival "how small business can manage cash for survival and the CARES Act"), including vendor reductions and pre-customer payments, there’s a new way for SBOs to access funds in the here and now that’s worth exploring as part of [the CARES Act](https://www.sharebuilder401k.com/blog/can-i-access-my-401k-or-ira-money-and-what-are-the-CARES-Act-options "How the CARES Act enables access to retirement accounts"). This and additional funding expected via SBA’s Payroll Protection Program may help many. ![Quote](//images.ctfassets.net/wsuay9fbp17w/ZoBnQeOvrorGCP7mceG08/761cab8d917752c71ad6ec4e99ae169b/Quote_AccesstoRetirement.png) __The CARES Act Offers Emergency Access to Retirement Accounts__ Whereas we don’t usually recommend tapping into your retirement nest egg, sometimes drastic times require drastic measures—and this pandemic has put many SBOs in dire straits so it shouldn’t be overlooked as an emergency source of funds. Through the recently passed CARES Act, the government has temporarily relaxed the rules for IRA and 401(k) withdrawals for people impacted financially or fiscally from COVID-19. In normal times, early IRA or 401(k) withdrawal meant SBOs would incur major taxes and penalties, but under the CARES Act, SBOs and Americans in general can now withdraw up to $100,000 of their vested retirement savings without the 10% penalty and the 20% withholding. If you’d like to avoid paying taxes on this money altogether and build your retirement savings back up too, you have three years to pay it back to your retirement account and avoid taxes on the withdrawal altogether. It is essential that a business owner—before tapping retirement money—feels reasonably certain their business can and will make it. If the retirement money is to be invested in the business as a final attempt to stay afloat, but the business is still likely to go bankrupt, it is best not to lose these retirement monies as well as the business. In other words, likely better for personal use or to leave it alone than to put toward the business.

__METHODOLOGICAL NOTES.__ The ShareBuilder 401k Retirement Survey was conducted by Wakefield Research (www.wakefieldresearch.com) among 500 U.S. Small Business Owners at companies of 1-50 employees, between March 27th and April 3rd, 2020, using an email invitation and an online survey. ShareBuilder 401k has fielded regular research on the small business marketplace since 2006. Results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of interviews and the level of the percentages expressing the results. For the interviews conducted in this particular study, the chances are 95 in 100 that a survey result does not vary, plus or minus, by more than 4.4 percentage points from the result that would be obtained if interviews had been conducted with all persons in the universe represented by the sample.

Is matching required in a 401k plan? Top reasons to offer a 401k match.

There is a very common myth that for an employer to offer a 401(k) plan to their employees, they must provide employees a matching contribution. In actuality, an employer is not required to offer a match at all. There are some compelling reasons to offer a match, and there is a big reason not to as well. __Top Reasons to Provide an Employer Match__ There are some good reasons why most employers do provide a match or other employer contribution for their employees. These include: 1. It can be a great way to help encourage everyone to use the plan. Knowing you will receive extra money towards your retirement saving by contributing is something employees value, including owners. 2. 401(k) benefits help with attracting and retaining top talent. The [cost to replace a good employee can be 10 times](https://www.sharebuilder401k.com/overview/cost-of-employee-turnover "The Real Cost of Employee Turnover") more than the cost to offer a 401(k) plan. Some employers like to use a vesting schedule to help drive an added incentive to stay. 3. Employer contributions are typically [100% tax deductible for the business](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax "401k matching is tax deductible"), so it’s a cash flow decision versus a cost item. 4. How much you match can be a very little or a lot – it’s flexible to fit your business needs. Some do a fifty-cent match on each dollar for the first 3% of salary an employee contributes, while others might do a dollar for dollar match for the first 5% or more of salary contributed to their 401(k). 5. Perhaps as powerful a reason as any to provide a match – owners and highly compensated employees (those earning more than $130K per year) may be restricted by how much they can contribute to your 401(k) plan without a match. 401(k)s have guard rails to ensure all employees that use your 401(k) are benefiting fairly. Generally, highly compensated employees (HCEs) may only contribute 2% more than the employee average salary deferral amount. So, if the average of your participating staff is a 4% contribution of their salary, the owner and highly compensated employees would likely be restricted to contributing up to 6% of their earnings. This may mean the HCEs are unable to contribute an amount near the 401(k) limit of $19,500 in 2020. This last reason is why many small and mid-sized employers choose to provide a 3-4% immediately vesting match – better known as a [safe harbor 401(k) plan](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k "Safe Harbor 401(k) Plans – More Savings, Less Hassle"). By providing a safe harbor qualifying match, owners and highly compensated employees can maximize their tax-deferred contributions in their own 401(k) account. This helps lower this year's taxes, put away a more meaningful amount for retirement, and automatically satisfy IRS discrimination tests. There are some very good reasons why some businesses choose to match but do not go the safe harbor route. Some like to use a two- to four-year vesting schedule to encourage employee retention or to better manage the program due to seasonal staff or other variables. __Top Reason Not to Match__ Cash is king and cash flow is a big reason not to provide a match. Highly seasonal businesses or businesses that are cash strapped at the moment, may not have the money to front for the match. Some businesses are cyclical, and while this year might be great, the next may not be, so that can drive cash flow concerns. Even if you don’t provide a match, 401(k)s enable your team to save automatically with each payroll and take advantage of the higher contribution limits of 401(k)s versus those of an IRA. Also know, that some businesses do an end of year [401(k) profit share](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes "How 401(k) Profit Sharing Helps Businesses Lower Taxes, Maximizes Owner Savings, and Rewards Employees") based on how the business performed to provide incentive. This can be $0 in tough years, and something exciting for all in good years. Regardless, matching is not required, and if it doesn’t fit your business, that’s just fine. It can still be a great benefit for your whole team. The important thing to know is you have options to offer a meaningful benefit to you and your employees. If you decide to do so, there are many great ways to design a match for your 401(k) plan to meet your business needs. Happy saving.

Are Down Markets a Good Time to Invest More in My 401k?

With the COVID-19 pandemic and the big stock market drop from February, many Americans have been concerned about their 401(k) balance and if they need to adjust their 401(k) investments to cash or equivalent funds. We discuss this in another [blog and video](https://www.sharebuilder401k.com/blog/top-two-employee-questions-answered-on-managing-your-401k-in-volatile-times "Managing your 401(k) investments in volatile times") if this is weighing on your mind (FYI, this may not be the right move for many). We are also receiving questions from across America that are nearly the polar opposite. If you tune into investing shows on CNBC, Bloomberg or other similar ones, you may hear that down markets like the one we are currently experiencing are potentially big buying opportunities. So, in this blog and video, we cover three questions: 1. If I have the means, is now a smart time to invest more in my 401(k)? 2. Should I invest more aggressively while the markets are down? 3. Is it a good time to increase my Roth 401(k) contribution percentage?

For more information on Roth 401(k)s, check out [Roth 401(k) – Meet Roth IRA's More Versatile Big Brother](https://www.sharebuilder401k.com/blog/roth-401k-meet-roth-iras-more-versatile-big-brother "Roth 401(k) – Meet Roth IRA's More Versatile Big Brother"). For more insights on investing in down markets, read [Do I Adjust My 401(k) When Markets Are Down?](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down "Do I Adjust My 401(k) When Markets Are Down?") Wishing you well.

Are 401k's Protected from Creditors and Bankruptcy?

Our CEO Stuart Robertson shares the scoop on the many situations that your 401(k) money is protected from creditors and in what instances your money may not be protected:

To recap the video highlights, 401(k) plan monies are typically protected from creditors and bankruptcies. However, if you signed off on a loan with the 401(k) backing it, in this instance, your 401(k) is not likely protected. Also, 401(k) monies don’t tend to be protected from federal agencies such as the IRS, but there are some important things to know with how this works, so read on. __Your 401(k) and the Fed__ If there is a reason such as back taxes, child support or alimony, the IRS may garnish your 401(k) money. However, 401(k) accounts legally belong to your employer, and this does offer some protection from federal tax liens, or at least the timing of when the money is taken. Under the Employment Retirement Income Security Act of 1974 (ERISA), the funds in your 401(k) only legally belong to you once you withdraw them to use as income. Until then, your 401(k) money is legally the property of the plan administrator—your employer—who is only allowed to release them to you. It tends to make no difference if you are an owner of the business or not. As a result, the IRS is unlikely to be able to force these funds directly out of your account. However, it can requisition all or a portion of any distributions you take—that is, any money you withdraw. So, in most situations, your 401(k) money is your money and has some nice protections to ensure it remains your money if things go south with creditors or your business. We most certainly hope that this is never something you will encounter. We’re also hoping that knowing these facts may give you some comfort during these uncertain times. Be well.

401k Questions: Are Down Markets Rare and How Long Do They Last?

ShareBuilder 401k's CEO Stuart Robertson answers employee questions to provide insights and perspective during the current COVID-19 pandemic and stock market turbulence. In this session, Stuart gives context on historical recessions and recoveries as well as information on the last major pandemic's (Spanish Influenza) impact on markets and the time to recover. In addition, he discusses what may help markets to rebound over time.

For examples, illustrations and more insights on investing during volatile times, please refer to the blog post [Do I Adjust My 401(k) When Markets Are Down?](https://www.sharebuilder401k.com/blog/do-i-adjust-my-401-k-when-markets-are-down "Do I Adjust My 401k When Markets Are Down?") For a video discussing whether moving money to cash or other investments is a good idea during down markets, view the video in the blog [Top Two Employee Questions Answered on Managing Your 401(k) in Volatile Times](https://www.sharebuilder401k.com/blog/top-two-employee-questions-answered-on-managing-your-401k-in-volatile-times "Top Two Employee Questions Answered on Managing Your 401(k) in Volatile Times").

How 401k Loans Work

401(k)s offer some pretty cool features for saving including high [contribution limits](https://www.sharebuilder401k.com/overview/401k-saving-advantages "401(k) saving limits") and [Roth 401(k)](https://www.sharebuilder401k.com/blog/roth-401k-meet-roth-iras-more-versatile-big-brother "Roth 401(k) and how it has more advantages than a Roth IRA") options. And if your company enabled the feature, your plan also offers access to your 401(k) savings via a 401(k) loan just in case of an emergency. 401(k) loans give you access to your account funds without any tax penalty and can help you get through a tough time. Yes, 401(k) loans can be good in a pinch, but as you’ll quickly see, there are some important items to consider before you decide to do so. So, here’s how it works and the potholes to avoid. __The Good__ You can get a loan from your 401(k) for up to 50% of your vested account balances (your personal contributions plus any vested matching or profit sharing from your company) with a cap of $50,000. You pay yourself back at a rate of Prime plus 1% (the Prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers). That’s a pretty good rate. Loans are put on a schedule to be paid back over a 5-year period. Typically, payments will be automatically deducted from payroll. There is one exception, which is a residential loan. These can be paid back over 30 years. Most plans restrict how many loans you can have outstanding to one or two at any one time. The charge to take a 401(k) loan is generally pretty nominal. __The Bad__ Your retirement savings will likely suffer. The money you take out for a loan will not have the opportunity to grow with your investments. This means it will probably take longer to reach your retirement savings' goal. You pay the loan back like any loan with your after-tax income and when you do withdraw the monies in retirement, it will be taxed again. Yet, the monies do grow tax-deferred once back in your 401(k) account until used in retirement. __The Ugly__ If you quit or lose your job, the outstanding 401(k) loan amount is due fairly quickly — typically within 30-60 days. If you do not pay off the balance within this time, the IRS treats this as a 401(k) distribution, and you will be taxed at your current tax rate plus a 10% early distribution penalty on top of it if you are younger than 59 ½ years of age. Ouch! Also, if you do not make payments to your 401(k) loan for 90 days, again the IRS will be unhappy and treat this as a 401(k) distribution. And that means it will be taxed at your current tax rate plus the 10% penalty. __Our Take on 401(k) loans__ Our vision is to [lead Americans to save](https://www.sharebuilder401k.com/why/about-sharebuilder-401k "About ShareBuilder 401k; Our Mission and History") — and loans are not a savings tool. If you are considering a loan given your personal situation, make sure you consider your company’s soundness and your job security. Having to come up with a big lump sum to pay back the loan if you were to be out a job isn’t easy. Or worse, being hit with taxes and penalties can be big hits to your savings and finances. We always suggest starting with y[our bank and then consider your other options](https://www.sharebuilder401k.com/blog/how-to-manage-loans-and-credit-cards-successfully "How to Manage Loans and Credit Cards Successfully") before tapping your 401(k). 401(k) loans do offer added security, convenience, and low rates, but the pitfalls that exist make them an emergency source of funds. If you do take a loan, see if you can pay the loan early, so you lower your risk to the Ugly and stay on track to meet your long-term goals. This material is intended only as general information for your convenience, and should not in any way be construed as investment or tax advice by ShareBuilder. You should consult with your tax advisor regarding any specific tax strategies.

2021 401k and IRA Contribution and Tax-Deferral Limits

The IRS released the contribution and tax-deferral limits for 401(k) plans, IRAs, and other retirement accounts for 2021. Changes are based on cost of living, and with low inflation in 2020, there are only a few changes of note in 2021 versus 2020. 401(k) employee contribution limits remain the same as 2020 (that amount will remain at $19,500). Like 2020, those over 50 years of age can make additional catch-up contributions of $6,500 per year (or $26,000 per year in total) to their 401(k) accounts. __The Total Amount You Can Defer Into a 401(k) is Increased to $58,000__ The one 401(k) area of import that changed is the amount you can contribute and receive in total to your 401(k) account. If you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $57,000 to $58,000 for 2021 with those over 50 years able to put in $64,500 with the catch-up. Here is a summary of the 2021 401(k) limits as compared to 2020: | 401(k) Limits for 2021 | | | | ----------------------------------- | -- | -- | | | 2021 | 2020 | | Employee contribution limit | $19,500 | $19,500 | | Annual limit per individual | $58,000 | $57,000 | | Age 50+ catch-up amount | $6,500 | $6,500 | | Annual compensation limit | $290,000 | $285,000 | | Highly compensated employees | $130,000 | $130,000 | __401(k) Saving Advantages Over Traditional IRAs Are Significant__ The tax advantages for 401(k) savers versus those opting to use IRAs or don't have access to a 401(k) plan is large and is now even a bit bigger. | 401(k) Advantages Over Traditional IRAs in 2021 | | | | ----------------------------------- | :-: | :-: | | | __401(k)__ | __IRA__ | | Annual limit per individual | $58,000
(employee + employer contributions) | $6,000 | | Age 50+ catch-up amount | $6,500 | $1,000 | | Roth income limit | None | $140K* | | Penalty-free access, if needed | Yes, via a loan | No | ^{*Beginning at $125K, the amount you are allowed to contribute begins to decrease, hitting $0 at $140K for singles (range is $198K to $208K for married couples filing joinly)} There is some good news for IRA savers. You can earn a little more and get to deduct your IRA contributions. Plus, the phase-out income limits for contributing to a Roth IRA are bumped up $1K to $2K depending on your filing status. In addition, the income limit for the Saver’s Credit for low- and moderate-income workers is $33,000 for singles and married filing separately for 2021, up from $32,500. It is $66,000 for married couples filing jointly for up from $65,000 and $49,500 for heads of household, up from $48,750. Refer to IRS cost-of-living adjustment for 2021 in [IRS Notice 2020-79](https://www.irs.gov/pub/irs-drop/n-20-79.pdf "2021 IRS Notice of Retirement Account Limits and Income Ranges") for more details.

2020 401k Contribution and Tax-Deferral Limits Set to Increase

Good news for 401(k) retirement savers. The IRS increased the contribution and tax-deferral limits for 401(k) plans for 2020. Employees can now contribute up to $19,500 per year starting in 2020 – a $500 increase. Those over 50 years of age received an added increase. Those 50 or more may now make additional catch-up contributions of $6,500 per year in 2020 (or $26,000 per year in total) to their 401(k) accounts. And if you receive company matching contributions or profit sharing, the all-in tax-deferral limit has been increased from $56,000 to $57,000 for 2020 with those over 50 years able to put in $63,500 with the catch-up. Here are the key 2020 401(k) changes to know as compared to 2019: | 401(k) Limit Increases for 2020 | | | | ----------------------------------- | -- | -- | | | 2020 | 2019 | | Employee contribution limit | $19,500 | $19,000 | | Annual limit per individual | $57,000 | $56,000 | | Age 50+ catch-up amount | $6,500 | $6,000 | | Annual compensation limit | $285,000 | $280,000 | | Highly compensated employees | $130,000 | $125,000 | ## 401(k) Saving Advantages Over Traditional IRAs Is Growing The tax advantages for 401(k) savers versus those opting to use IRAs or don't have access to a 401(k) plan is large and is now even a bit bigger. Note that IRS contribution limits remained unchanged from 2020. | 401(k) Advantages Over Traditional IRAs in 2020 | | | | ----------------------------------- | :-: | :-: | | | 401(k) | IRA | | Annual limit per individual | $57,000
(employee + employer contributions) | $6,000 | | Age 50+ catch-up amount | $6,500 | $1,000 | | Roth income limit | None | $139K* | | Penalty-free access, if needed | Yes, via a loan | No | ^{*Beginning at $124K, the amount you are allowed to contribute begins to decrease, hitting $0 at $139K for singles (ranges is $196K to $206K for married couples filing joinly)} Refer to IRS cost-of-living adjustment for 2020 in [Notice 2019-59 (PDF)](https://www.irs.gov/pub/irs-drop/n-19-59.pdf) for more.

ShareBuilder 401k Is Now a Corporate Sponsor of Financial Beginnings

We, ShareBuilder 401k, are now a corporate sponsor of the nonprofit, [Financial Beginnings](https://www.financialbeginnings.org/ "Financial Beginnings Homepage"). We are working with them to empower more Americans with financial skills and knowledge to build a better future. ShareBuilder 401k’s mission is to Lead Americans to Save. Financial Beginnings is a nationally expanding nonprofit focused on teaching youth and adults in low-income and impoverished communities how to play an active role in their financial well-being, thereby enabling greater life opportunities like home ownership, higher education, and secure retirement. Our missions align in many ways, and I’m thrilled to extend our resources, skills and knowledge to give more people a leg up and help them build stronger foundations for the future. There is a big need for financial education to better our society. Our nation’s school curriculums don’t tend to focus on basic financial budgeting and money management. There is a large economic gap between Black Americans and Caucasian and other ethnic groups in America. Many Americans are suffocating under the load of [loans and credit cards](https://www.sharebuilder401k.com/blog/how-to-manage-loans-and-credit-cards-successfully "How to Manage Loans and Credit Cards Successfully"). ![Financial Beginnings Education Programs](//images.ctfassets.net/wsuay9fbp17w/ZvXS26lhgytEJXdyuGBiI/74cdaadf8bcb99e44d097f3696363a41/Financial_Beginnings.png) Financial education can have a powerful impact on helping more Americans [take control](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart "How to Budget and Manage Your Money Smart") of their financial lives, better take care of their loved ones, pursue their dreams, and have a more powerful voice in our country. As a [partner sponsor](https://finbegwa.org/sponsors/ "Financial Beginnings Corporate Sponsors") for the Washington affiliate, ShareBuilder 401k will support development and execution of Financial Beginnings’ educational programs delivered through local and regional classrooms, community groups, events and more. We can all take part as volunteers and educators to improve our communities and nation, and this is one way we are excited to give back. __Could Your School or Community Benefit from a Class?__ If you work at a school or community that could benefit from a class, go ahead and learn more and sign up by [clicking here](https://finbegwa.org/schedule-a-class/ "Schedule a class for financial education"). If this is something you are also passionate about, you can become a volunteer for Financial Beginnings too. They offer [orientation classes](https://www.financialbeginnings.org/volunteer-sign-up/ "Financial Beginnings Volunteer Sign-up") and more.

Pay Yourself First

When we think about self-care, what usually comes to mind is enjoying a hobby, going out for a nice meal, relaxing in the outdoors, or perhaps buying something special. But what better way to practice self-care than by creating a life with as much financial flexibility and freedom as possible? Unfortunately, while most of us want financial freedom, many of us are poorly prepared for the future. According to the Federal Reserve, [one-fourth of all U.S. workers have no retirement savings](https://www.federalreserve.gov/publications/2022-economic-well-being-of-us-households-in-2021-retirement.htm "Economic Well-Being of U.S. Households"). Whether you’re currently in this boat or not, we’d like you to consider the method of “paying yourself first.” “Pay yourself first” means prioritizing saving over any other financial goals or needs. In other words, you’d automatically allocate a portion of your income to a savings or retirement account. If you talked to anyone who’s great at accumulating wealth, there’s a big chance that they always pay themselves first. So, before you pay a single bill or grab a fancy coffee, do you yourself a huge favor and make saving a priority. Contributing to a 401(k) plan is a perfect way to pay yourself first. When you automatically place 10 – 15% of your salary into your 401(k), that money goes straight from your business payroll into your 401(k) account. Because you won’t see that money, you can’t spend it. On the other hand, if that cash is sitting in your wallet, you’ll be a lot more tempted to spend it on something you may not even need. As your nest egg builds, this can relieve a lot of financial anxiety about the future so you can focus on today. If you’re already saving for retirement, great! Use this handy guide to see if you’re on track for a comfortable retirement, or whether it makes sense to [increase your contributions](https://www.sharebuilder401k.com/blog/how-much-to-save-for-retirement/ "How Much to Save for Retirement"). | Your Age | Amount Saved for Retirement| | | ----------------------------------- | -- | -- | | 30 | 1x Salary | | 40 | 3x Salary | | 50 | 6x Salary | | 60 | 8x Salary | | 67 | 10x Salary | Another fantastic benefit of socking away funds into a 401(k) is that you can save tax-deferred, meaning your taxes will be lower this year and the money won’t be taxed until withdrawn in retirement. Start thinking of new ways to pay yourself first, make it automatic and you can be the one that secures a nice, comfortable retirement. Need thoughts on budgeting that can help with better saving and debt management? Read [How to Budget and Manage Your Money Smart](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart/ "How to Budget and Manage Your Money Smart").

How a 401(k) Can Help Your Business through Challenging Times

Small business owners often think of starting or investing in a retirement plan like a 401(k) when markets are steady, and business is strong. Afterall, 401(k)s are the go-to benefits to build a nest egg for the future, protect earnings from taxes, and recruit and retain top talent – all great things to consider when times are good. What many entrepreneurs and small business owners don’t realize is starting or investing in a 401(k) can be a smart move in periods of market downturn and uncertainty, like those we’ve experienced over the past few months. Here are three ways 401(k)s can benefit small businesses and their employees through challenging times: 1. __Potential for bigger market returns.__ Investing through a downturn can be like buying at a discount or at a low. Historically, markets have rebounded off lows. While there are no guarantees, over time as markets recover, your nest egg gets a bigger boost because you bought at a lower price during the down times. If markets are volatile and jump up and down, investing can still play to your advantage. Consider this hypothetical example where markets drop dramatically from a high and then partially recover, and how an investor can be better off: ##### The Upside of Investing in Volatile Markets | **Period** | **Amount Contributed** | **Fund Share Price** | **Shares Purchased** | | ------------ | :----------: | :----------: | :----------: | | 1 (market high) | $500 | $100 | 5 | | 2 (market low) | $500 | $50 | 10 | | 3 (recovering market) | $500 | $75 | 6.67 | | Totals | $1,500 | $75 average | 21.67 | | Value | $1,625.25 | 21.57 shares x $75 | |

By investing through the ups and downs, the investor in the example above is 8.35% better off even though the market has not come close to exceeding the previous high. To learn other insights on investing in volatile markets, check this story out.

2. __Money protected from creditors.__ For business owners facing creditors or even the unfortunate possibility of bankruptcy, one major advantage to having a qualified retirement plan such as 401(k) plan is that all contributions and earnings in those accounts are generally [protected from creditors](https://www.sharebuilder401k.com/blog/are-401k-monies-protected-from-creditors-and-bankruptcy "insights on when 401(k) monies are protected from creditors") – so those retirement savings are safe. 3. __Emergency access to cash.__ A penalty-free access to a 401(k) loan of half your vested balance up to $50,000 has always been a nice emergency feature of 401(k) plans. And now during this extraordinary time of the pandemic, employees including business owners with an IRA or 401(k) that face financial difficulty due to COVID-19 have the [option of taking a hardship withdrawal](https://www.sharebuilder401k.com/blog/can-i-access-my-401k-or-ira-money-and-what-are-the-CARES-Act-options "CARES Act options to access retirement accounts without penalty") of up to $100,000 from either of these retirement account types with no tax or penalty through the end of 2020. This can be worth considering if you are struggling through a tough time, but you’ll want to understand the risks and implications of doing so. Taking [the step to start a retirement plan](https://www.sharebuilder401k.com/overview/steps-to-setting-up-a-401k "How to set up a 401(k) plan") and invest in the markets can feel overwhelming for business owners and workers at any time, and even more so with the challenges and uncertainty we’ve faced in recent months with COVID-19. But for many businesses, starting and investing in a plan during times like this could offer unique benefits – including added protections for your savings, potentially higher than average returns, and more options for you and your valued employees to better manage through financial emergencies.

Index funds and how they can help you save better for retirement in your 401(k)

There are a lot of buzzy terms when it comes to 401(k)s, and one that’s particularly worthy of the attention are index funds. Why? Because index funds are one of the easiest and most effective things to add to your retirement arsenal. They also happen to be way too scarce in 401(k) plans for some not so good reasons. __What’s an index fund?__ Let’s start off with the basics. An index fund is a type of hands-off fund that tracks a particular benchmark financial index, such as the S&P 500, Nasdaq or the Dow Jones Industrial Average. In fact, it’s designed to mimic the performance of these market indexes. It’s a passive way to invest in the markets—and it’s this passivity that makes it a fantastic, low-cost alternative to actively managed funds that are offered through most 401(k)s. Exchange-Traded Funds (ETFs) or Index mutual funds are the most common methods for folks to invest in an index fund. __Why costs matter in investing?__ Each dollar going towards investment expenses is one less dollar staying in the markets to invest and grow over time. In fact, a difference of 1% in fund [expenses can literally cost you hundreds of thousands of dollars](https://www.sharebuilder401k.com/why/index-fund-advantage/ "Index fund advantages with example of how 1% lower fund expenses can save investors money") over a 40-year career. The fund expense ratio is how you typically get a sense of the cost or drag on your investment. Any fund with an expense ratio over 1% is a red flag that you are paying too much. It is really tough to beat the markets, and index funds are the closest thing to buying the market. Now think about a fund manager trying to beat the market and has to overcome all the added costs to try to figure out market moves. Do you think many do? (Hint: history is on the side of the low expense one). __Why do actively managed funds costs more than index funds?__ Actively managed funds typically have more costs associated with them than index funds for several reasons: - there’s a bunch of research that needs to be done to try and forecast market or sector moves - there’s typically more costs of trading stocks and bonds within the fund as they switch tactics - there are the added manpower hours to run an actively managed fund - there are marketing and other costs that are charged via 12b-1 fees and can even include front- or back-end loads (if you see loads in a fund, we strongly suggest you avoid it) The list goes on, as the costs can too. And with each extra dollar of expense incurred, the fund still has to overcome these expenses to outperform its benchmark index (usually the success measure of actively managed funds). But when you have index funds, most of these costs are eliminated and why the fund expense ratio is often much lower. Guess who ultimately reaps the benefit of less costs? You. __History sides with index funds for better long-term performance__ So, don’t get us wrong, these higher expenses might be worth it if evidence showed that actively managed funds were consistently outperforming the indexes. But that’s not usually the case. In fact, history has sided with index funds. Across major asset categories, the benchmark indexes over the last five years have beaten 82% to 95% of actively managed mutual funds across major equity asset classes: ![SPIVA Scorecard](//images.ctfassets.net/wsuay9fbp17w/28zXRlGKW1LhuYzrnIftYF/c2ebc710ab2aa517cff87a761cd7039c/SPIVA_with_Title.png) There are very few managers that have beaten their benchmark over a 5-year track and the list gets smaller and [smaller over a 10- or 15-year time horizon](https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html "Active fund managers trail the S&P 500 for ninth year in a row - CNBC"). We’re not soothsayers over here and can’t predict the future, but those facts are pretty darn compelling. Do know that history is no guarantee of future performance. Markets, companies, governments, and economies are constantly changing. However, we do try to learn from history and apply it as best we can. __Takeaway:__ keep fund expenses low so more money stays invested and working for you. This is something we strongly believe is the better way for long-term investing. __Why are index funds scarce in 401(k) plans?__ There are several reasons why many 401(k) providers offer very few index funds in their investment line-ups. Probably the biggest reason is that the provider that sold you your 401(k) plan and/or those that service your plan are often paid through the fund expense ratios. You may have heard of 12b-1 fee, Sub-TA, or other fund fees. These will usually be bundled into the fund expense ratio. Well, index funds don’t have 12b-1, Sub-TA or other pass through fees that are common in actively managed mutual funds and insurance products. If a provider allows more than a few index funds in your 401(k) roster, they make less money. Other reasons include that many fund providers are also 401(k) providers, and they would like to have their funds in your plan. While they may want to make sure the asset class is right for retirement investing, they’d probably also like to earn more money so a higher expense fund might find its way into the line-up. Now think if they moved all their clients to index-based 401(k) plans en masse. That simply would not be good for their bottom line. __Join the groundswell for index-based 401(k) plan for a healthier retirement!__ When you’re evaluating what 401(k) plan to trust with your retirement, look to see how many index funds are included. If you see even three or four, you’re ahead of the game. However, that’s not good enough. Here at ShareBuilder 401k, we care so much about keeping things low expense to help Americans save that we think 100% of your funds should be in index funds (the Cash or Money Market option is the exception). In fact, we pioneered the all-ETF 401(k) plan in 2005 and have never looked back. After all, if index funds historically performed better than higher cost actively managed funds, why not build a solid, diversified portfolio for less? That just means more money stays invested in your 401(k) today and ongoing to better serve your retirement tomorrow.

How Much to Save and How to Prioritize Competing Budget Needs

You may be aware that experts recommend you will need to save 10%-15% of your income over a 30- or 40-year career to build up 10 times your annual earnings by age 67. This is believed to enable you to live at your standard of living. That all sounds good, but we all know there are tons of competing priorities between our needs, wants, paying off debt, building emergency savings, and the list goes on. So, let’s get into saving needs, and then some ways to think about prioritizing between saving and debt management. We suggest you read our previous blogs on [How to Budget and Manage Your Money Smart](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart "How to Budget and Manage Your Money Smart") and [How to Manage Loans and Credit Cards Successfully](https://www.sharebuilder401k.com/blog/how-to-manage-loans-and-credit-cards-successfully "How to Manage Loans and Credit Cards Successfully") for a more holistic framework.

__Building Up Your Emergency Savings and Other Saving Categories__ The average American has an unplanned financial expense (aka. a financial shock – medical, car issue, appliance failures, lost a job) every few years if not every year. Meanwhile, 69% of Americans have less than $1,000 in savings accounts. That's not a good recipe for success for many of us. You quickly get a sense of how important having some savings really is. Let's consider that savings can be bucketed into three categories: 1. __Emergency / Short-Term__ – you will need the ability to access this bucket at any time and quickly to manage an unexpected expense. Most people will want to put this in a bank savings account to earn a little interest and keep it separate from their spending/checking account. 2. __Mid-term / Big Purchase__ – you may want to get a car, have money for a down payment on a house, or other important purchase. You will save some in a savings or a money market account, and you may also choose to invest some in the market knowing there is risk and reward to consider if you do. If it's for a child's education, consider starting a 529 plan. 3. __Long-term / Retirement__ – Ah, the option to pursue your other dreams without a job. Investing in stock and bond funds are the predominant way to build over the long-term to get to this destination. A 401(k) plan and/or IRA are typical vehicles to use. If you have access to a 401(k) plan, this can be the automatic way to work towards saving 10-15% of your income each year. A company match and higher contribution limits than IRAs can help you get there. __Find a Good Interest Rate for Short-Term Savings__ Savings accounts and money markets are typically the better options for short-term savings. Savings accounts are backed by FDIC up to $250K and money markets are backed by SIPC for up to $500K. You can feel pretty secure with either option that you’ll get your money back if any of your institutions were to fail. Money markets have a little more risk as it possible they can come off the dollar, but from good providers, this is unlikely. Many saving and money market accounts pay low interest rates. That said, there are some that pay a better rate which can help you earn more over time. Ally Bank or Capital One may be worth considering for a higher interest rate savings account. Vanguard, Dreyfus, and several others tend to have higher interest rate money markets. __Setting Your Financial Priorities__ So how should you prioritize saving vs. debt payment? Everyone’s situation is different. That said, in general, we suggest the following in aligning your priorities to gain control and put your money to work for you: 1. Review your earnings and spend over the last three months and categorize into the [50-30-20 buckets](https://www.sharebuilder401k.com/blog/how-to-budget-and-manage-your-money-smart "How to Budget and Manage Your Money Smart"). If you are not earning more than you spend and/or not aligned with 50-30-20, what moves can you make? This may include finding a place with lower rent or a lower cost car if your needs spending is well over 50%. It may be simpler like cutting the amount you order in or how much you spend on clothes. 2. Build up a savings account to $1,000 if you haven’t already. This helps you cover a financial shock that can easily arise. 3. [Pay off your credit cards](https://www.sharebuilder401k.com/blog/how-to-manage-loans-and-credit-cards-successfully "How to Manage Loans and Credit Cards Successfully") or build your plan to do so. 4. Take advantage of your 401(k) and get your company match at minimum. You want to build to 10-15% of your earnings in a long-term account. If you don’t have a 401(k) option, start an IRA. Unless you are in financial crisis, if you receive a 401(k) match, you will want to participate in your 401(k) enough to get it, as well as work down your credit card debt at the same time. 5. Focus on getting your short-term savings to at least three months of your income, and as you hit your thirties and forties, get to 6 months or more. 6. If you plan to or have bought a condo or home, look to have your mortgage paid off by the time you retire or be good with potentially downsizing. This can mean make extra payments, moving to a short-term loan, or other scenario. Know that if you refinance your mortgage, this will start your time frame to pay off your home all over again unless you move to shorter term mortgage. The savings can definitely be worth it, just consider how long you want to manage this major expense. 7. If you have the ability for extra saving, you will want to consider additional investing options such as a retail investing account or perhaps a 529 college fund if you have children. Wishing you success on your road to financial freedom! *Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals.*

A Multi-Million Dollar Reason to Start a 401(k) Plan for Your Small Business

There’s an urban legend that Albert Einstein proclaimed compound interest to be the most powerful force in the universe. Whether he said this or not, how your money can grow over the long-term can be something to behold. __A Nest Egg of $1 Million Dollars in 20 or Less Years – A Hypothetical Example__ Consider a business owner, or any employee, who is able to put in the 2020 maximum contribution of $19,500 into his or her 401(k) account tax deferred. If we assume each year this amount is contributed and these contributions earn an annual 8% return on investment, in a bit over 20 years, you would have built up of over $1,000,000 in retirement savings. This assumes there is not an employer match. Meanwhile, you’d have only contributed $398,125. That’s the power of compounding. Oh, and thanks to compounding, you’d reach more than $2,000,000 in your account in 27.8 years and have invested $520,000. Time can be on your side. Now let’s assume you receive a 4% match on top of what you contributed as described above. Let’s say you are a business owner and you earn $200,000 per year. For simplicity, your salary never changes and you receive the same matching contribution each year. With this match, it only takes you 17 years and 1 month to attain one million dollars in savings and 24 years and one month to surpass two million. ![Million Dollar Plus Retirement Savings Chart Example](//images.ctfassets.net/wsuay9fbp17w/4B7xRMMKCQNjmDmtNesfAf/fe59106a8c5c955de329d18f4b319508/Hypothetical_401k_Saving_Example.png) There are no guarantees on future performance for sure, and we know future performance will vary from the past and markets will experience good and bad years. For reference, historically a portfolio of 60% in U.S. stock funds and 40% in U.S. government bonds achieved an average 8.27% annual return.+ __401(k) Savings Can Add Up, Tax Benefits Are Meaningful, and 401(k) Plans Are Pretty Inexpensive for Your Business__ Yes, you can see how regularly contributing can really add up over 20 or more years in a 401(k). You probably also know it can save you money on this year’s taxes too. However, you may not be aware that offering 401(k) benefits can be a low-cost program for any size business. Providers like ShareBuilder 401k start at less than $100 per month in administration for a business of 10 or less employees. And if your business has 1 to 100 employees and this is your first 401(k) plan, your business can qualify to receive half of these costs back in government tax credits for the first three years of your plan ([up to $15,000 in tax credits](https://www.sharebuilder401k.com/blog/new-small-business-tax-credits-can-cut-costs-in-half-to-offer-a-401k "New Small Business Tax Credits Can Cut the Costs in Half to Offer a 401(k) Plan for Your Firm for Three Years")). Lastly, while an [employer match is optional](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match "Big 401(k) Decision -- To Match or Not to Match") in a 401(k), if you do offer a match, it’s typically [100% tax-deductible](https://www.sharebuilder401k.com/blog/hear-ye-hear-ye-401-k-matching-isnt-required-and-it-can-be-100-tax "401(k) Matching Isn't Required and It Can Be 100% Tax Deductible"). Pretty cool reasons – potentially millions of them – to start a 401(k) plan today. *+ Based on SBBI data from 1926-2018. Assumes an account holding 50% in large stocks (S&P 500), 10% in small business stock fund, 35% in long-term U.S. government bonds and 5% in U.S. Treasures. This portfolio averaged 8.27% annual return during this time frame. The allocation is 60% in stock funds and 40% in bond funds.*

The Top Three Retirement Plans for Small Business

You know we’re big fans of helping Americans put some money away for retirement. In helping so many businesses start their first 401(k) plan, you might think a 401(k) is the right call for all small businesses when they are ready to add a retirement plan. Well, maybe. You may not know, but there are quite a few different retirement options out there designed for small businesses. Let's go over the essentials so you too can make the right decision for your company. Three options stand-out depending on how much flexibility you need and what you want to accomplish with your plan. These are: 401(k) plans, SEP IRAs and SIMPLE IRAs. So answer these questions and we can start honing in on the best fit for your business: 1. Do I want to allow employees to contribute to the plan? 2. If so, will some want to save more than $15,500 a year? 3. Do I need flexibility to access the funds prior to retirement for emergencies? 4. How important are managing future taxes (a [Roth option](https://www.sharebuilder401k.com/blog/roth-401k-or-regular-401k-which-is-best-for-you/ "Roth 401k or regular contributions -- which is best for you?")) versus my tax needs today? 5. Can I afford a [match for my employees](https://www.sharebuilder401k.com/blog/big-decision-when-starting-a-401k-plan-to-match-or-not-to-match/ "To match or not to match employee contributions when starting a 401k plan")? Other things to consider include whether you want a [profit-sharing option](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/ "How 401k profit sharing helps businesses lower taxes") or not, and do you have a business that experiences high employee turnover. If you expect high turnover, a 1-year eligibility requirement, vesting schedule for profit sharing, and/or matching contributions can be a great way to go. Now that you’ve answered those questions, here’s the scoop to help you identify the right retirement benefit for your company. __The 401(k) Offers the Most Flexibility and High Contribution Limits__ The 401(k) plan is probably the most widely known retirement product on the market. It’s the fully loaded, high performance jet plane of retirement plans. It’s generally defined as one that enables a business owner and employees to make consistent, tax-deferred contributions during the length of their careers. But 401(k) plans offer a lot more versatility than that. 401(k)s not only offer higher contribution limits than most other plan options, but also offer more choices in design to manage business costs and program saving goals. You can choose to match or not, provide a vesting schedule, or enable penalty-free access to funds via a loan if an emergency arises. 401(k) plans also allow for “catch-up” contributions after reaching the age of 50. In 2023, employees can contribute up to $22,500 if under 50 years of age, $30,000 if 50 or over. For small businesses and employees that may fear higher tax rates in retirement, the Roth 401(k) enables participants to have their contributions taxed up-front, but withdrawals in retirement are tax-free, earnings and all. This can be a big help in managing your tax situation and money over time. __SEP IRAs are Pretty Easy to Start and 100% Funded by the Employer__ Simplified Employee Pensions, more commonly referred to as SEPs, are also a popular retirement plan choice as they offer a contribution limit that’s similar to a 401(k). It doesn’t have all the bells and whistles of a 401(k) plan, but it’s a solid airplane that can get you to your destination. One of the most important things to understand about SEPs is that 100 percent of the contributions made are by the employer (no employee contributions allowed) and these dollars are immediately vested for the employee. As of 2023, Roth contributions are now allowed in a SEP; however, no loan option, no profit-sharing option, and no catch-up contributions for those over 50 years of age like there are with a 401(k). But it also doesn’t generally have the added IRS tests and reporting that 401(k) plans do. __The SIMPLE IRA is a Solid, Affordable Third Option__ I’m going to change my airplane analogy on this one. I compare a SIMPLE IRA to having the middle seat on the airplane. It’s just not as good as having the window or aisle seat and definitely not as nice as flying first class. The SIMPLE IRA’s name is a bit misleading (it actually stands for Savings Incentive Match Plan for Employees -- not so simple some joke). While both employer and employee can contribute to the SIMPLE, the employer must match and matching is vested immediately. Also, the employee contribution limit is set at $15,500 for 2023, a full $7,000 less than a 401(k). The catch-up for those over 50 is also less at $3,500 versus $7,500 for a 401(k). It also doesn’t have loan options, but like the SEP, avoids IRS tests and reporting requirements of a 401(k). Note that a 401(k) plan with a [Safe Harbor](https://www.sharebuilder401k.com/blog/what-is-a-safe-harbor-401k/) design automatically satisfies IRS tests if prefer a 401(k). A summary of the top differences outlined here below: ##### Top Retirement Plan Options Summary | **2023** | **401(k)** | **SIMPLE IRA** | **SEP IRA** | | ------------ | :----------: | :----------: | :----------: | | Who can contribute| Employee; Employer optional | Employee & Employer | Employer only; must contribute for all eligible employees | | Max Employee Contribution| $22,500 w/$7,500 catch-up if over 50 years old| $15,500 w/$3,500 catch-up if over 50 years old| Not applicable | | Employer Contributions| Optional, up to 100% of an employee's compensation with a $66K cap via match, profit share, or other employer contribution | Required match of 100% on the first 3% of participating employee contributions or 2% of all eligible employee salaries| Optional, but only way to fund; up to 25% of an employee's pay with a $66K cap | | Vesting Timing for Employer Contributions| Up to Employer - Immediate or Vest over time | Immediate | Immediate | | Access to Funds before age 59 ½| Penalty-free loans or 10% penalty for early withdrawal | 25% penalty for withdrawing within first 2 years of participating; 10% thereafter | 10% penalty for withdrawal before age 59 ½ | Now you have the intel on what are considered the best retirement plan options for businesses with less than 50 employees. Wishing you well on your journey to a well funded retirement. *FYI, there is a SIMPLE 401(k) product too, but it’s very similar to SIMPLE IRA, so we focused on the SIMPLE IRA for comparison to the SEP and 401(k) in this story. This blog was updated in 2023 for contribution and other applicable feature changes.*

How to Compare 401k Plan Costs

Here are five items to know and consider that will help ensure you are receiving a fair price for your 401(k) plan. No matter if you are thinking about starting your first retirement plan for your business, or you are reviewing your current provider’s costs, make sure you evaluate the following: 1. __Keep all-in investment expenses under 1%.__ While it’s easier to focus on administrative costs, low investment expenses are what really matters when it comes to a good 401(k) plan and for investing in general. Investment expenses include the fund expense ratios as well as any investment management, 12b-1, and other associated costs. Whether you’re just starting a plan or have a plan with $25 million in assets, it is more than doable to [keep costs under 1%](https://www.sharebuilder401k.com/why/index-fund-advantage/ "Low-expense investment advantage and index funds"). We believe this is essential for long-term success. 2. __Limit your investment options to low-expense funds.__ What percentage of your investment roster is made up of index funds versus actively managed funds? [Index funds](https://www.sharebuilder401k.com/blog/whats-an-index-fund/ "What are index funds and how they can transform your company's 401k benefits") typically have lower expenses than actively managed funds. If most funds in your investment roster are actively managed investments, think about how the expenses stack up and whether the fund performance of these over 5 and 10-years align with their benchmarks and comparable index funds. 3. __Work to have recordkeeping and administrative costs charged to the employer versus a flat per participant charge.__ It’s not uncommon for a flat per participant charge to be applied to small business and even mid-size company plans. It’s typically a flat monthly or quarterly charge deducted from each participant’s account. Ideally, beyond the investment expenses, there are no costs passed on to the participant so more money stays invested in the markets. If admin costs are covered solely by the employer, the costs are tax deductible for the business, but if passed on to participants, these are not deductible. Also, small businesses with a new plan, may receive [tax credits](https://www.sharebuilder401k.com/blog/irs-tax-credits-cover-costs-of-401k-for-small-businesses/ "IRS tax credits cover costs of 401ks for small business") in addition to deductions to manage admin costs. If the plan is large enough, investment expenses may cover admin costs altogether. 4. __Know how your 401(k) provider(s) earns money on your plan.__ A straightforward and fair approach is to apply a flat investment management expense across the plan to manage ERISA 3(38) services, plan consultation, employee education, and in some cases recordkeeping and custodial services. Don’t be surprised to find that marketing expenses (12b-1s and revenue sharing), share class, and wraps vary by fund with your current provider. Why? How is that fair? These other fees and expenses can unknowingly penalize an employee for picking one fund over another. Also, are you getting the services you want, desire, or need to run a great plan at a reasonable price? Does the service really vary by fund? 5. __Does your 401(k) provider keep costs in check?__ Does your provider offer automatic pricing discounts to lower expenses as your plan grows past identified milestones to ensure pricing remains low for employees and your business? We believe this is the right approach. As your plan assets grow, pricing needs to drop as your plan becomes more valuable to your provider. Lower costs can help employees save more over time too. We hope this provides you valuable insights on how to get a plan priced right for your business. To learn more about 401(k) costs, check out *[Understanding 401(k) Costs](https://www.sharebuilder401k.com/help/understanding-401k-costs/ "Understanding 401k costs and what a fair price looks like.")*. To learn more about 401(k) services, give this a read *[What 401(k) Plan Services Your Business Will Need and Value](https://www.sharebuilder401k.com/blog/what-401k-plan-services-your-business-will-need-and-value/ "401k plan services your business will need and value")*.

Everything you need to know about SIMPLE 401(k)s, SIMPLE IRAs and SEP IRAs | ShareBuilder 401k

As a small business owner, there are a lot of choices when it comes to a retirement plan for you and your employees. You may have come across SIMPLE (Savings Incentive Match Plan for Employees) 401(k)s, SIMPLE IRAs, SEP (Simplified Employee Pension) IRAs, and of course, the 401(k), as potential candidates. Unfortunately, just because it’s called SIMPLE, doesn’t mean it is. Let’s go through the ins and outs of these retirement plans and how they compare to 401(k)s, so you can get the facts straight about what is best for your business.

| Features | 401(k) | SIMPLE 401(k) | SIMPLE IRA | SEP IRA | | ---------- | ---------- | ---------- | ---------- | ---------- | | __Contribution limit for 2024 is...__ | Up to __$23,000__ or __$30,500 if age 50 or older.__ | Up to __$16,000__ or __$19,500 if age 50 or older.__ | Up to __$16,000__ or __$19,500 if age 50 or older.__ | Up to __25% of the employee's total compensation__ (limited to $345,000), __not to exceed annual limit of $69,000.__ | | __Matching is...__ | Optional, but may limit owner contributions. | Required up to 3% __OR__ a non-elective contribution of 2%. | Required up to 3% __OR__ a non-elective contribution of 2%. __Can reduce match down to 1%__ in 2 out of every 5 years. | Not applicable. __Employee contributions not allowed.__ Employer funds all contributions. | | __Loans are...__ | Available to withdraw, with no taxes or penalties, 50% of your savings (up to $50,000) annually. Accrues interest and must be paid back within 5 years. | Available to withdraw, with no taxes or penalties, 50% of your savings (up to $50,000) annually. Accrues interest and must be paid back within 5 years. | Not available. | Not available. | | __IRS testing is...__ | Required. [Safe Harbor 401(k)](https://www.sharebuilder401k.com/products-pricing/safe-harbor-401k/ "Safe Harbor 401(k)") plan designs automatically satisfy testing. | Not applicable. | Not applicable. | Not applicable. | |__Vesting schedule is...__ | An option with various percentages and years. May also choose to not use this feature. | Not applicable. Employer contributions must be fully vested immediately. | Not applicable. Employer contributions must be fully vested immediately. | Not applicable. Employer contributions must be fully vested immediately. | An option with various percentages and years. May also choose to not use this feature. | Not applicable. Employer contributions must be fully vested immediately. | Not applicable. Employer contributions must be fully vested immediately. | Not applicable. Employer contributions must be fully vested immediately. | |__Employee eligibility requirements are...__ | Flexible. Can set service requirements and age limits as needed. | Any employee with 1 year of service and at least 21 years old. | Any employee who earned at least $5,000 during the last 2 years. No age requirement. | Any employee who’s worked at least 3 of 5 years, 21 years old, and earned a minimum of $750. |

## __What is a 401(k)?__ A 401(k) plan is a tax-advantaged retirement benefits plan and has become the most common type of retirement plan for businesses with employees. 401(k)s offer the greatest contribution limits for employees and employers and offer flexibility when it comes to plan features. You can choose a 401(k) that allows for 401(k) loans, hardship withdrawals, in-service distributions, vesting schedules, and more. 401(k) plans can be designed as a Traditional 401(k) or Safe Harbor 401(k) depending on the features you want and the ease of year-end administration you desire. 401(k)s do not have a limit on the number of employees employed by your business. As your business scales, your retirement plan can grow with it, and that means one less thing you need to worry about. 401(k)s allow eligible employees the ability to contribute money from their paycheck either pre-tax (Traditional) or post-tax (Roth deferrals). In addition, [profit-sharing](https://www.sharebuilder401k.com/blog/how-401k-profit-sharing-helps-businesses-lower-taxes/) is a great way to reward employees and lower your taxes while you’re at it. You can think of it as employee bonuses with tax benefits. With these plan offerings, you can attract and retain talented employees who appreciate the amount of options they will have when it comes to their retirement savings. But while 401(k)s are more flexible, some 401(k) plan designs have an extra level of plan administration and annual nondiscrimination testing to ensure that highly compensated employees are not being favored over non-highly compensated employees. Much, if not all, of these can be avoided with the Safe Harbor 401(k) design, which requires immediately vested employer contributions like the other retirement plans that are discussed here. ### __401(k) Contribution Limits__ The maximum deferral amount for 401(k)s in 2024 is $23,000 with an additional $7,500 catch up contribution for those age 50 or older. These contribution amounts are adjusted annually for inflation, and are thousands of dollars greater than the contribution limits for SIMPLE 401(k)s. ## __What is a SIMPLE 401(k)?__ A SIMPLE 401(k) is a simplified version of a 401(k) plan and is offered only to small businesses with fewer than 100 employees. If at any point the business exceeds 100 employees, there is a 2-year grace period before the plan must be switched over. SIMPLE 401(k)s offer the ability for eligible employees to contribute post-tax (Roth deferrals), and they include 401(k) loans, hardship withdrawals, and in-service distributions. They are not subject to nondiscrimination testing; however, they are required to annually file a Form 5500. If you’re in the market for a retirement plan with easy administration, a SIMPLE 401(k) checks that box, but do keep in mind that you can choose a Safe Harbor 401(k) plan design which automatically satisfies testing. When starting the SIMPLE 401(k), there are some requirements when it comes to employer contributions. You the employer must make either: - A matching contribution up to 3% of each employee’s pay, or - A non-elective contribution of 2% of each eligible employee’s pay The employees are immediately vested in any and all contributions and no other contributions can be made. Businesses with SIMPLE 401(k)s cannot sponsor another qualified plan such as a profit-sharing plan, so in general, they do not have the discretion to choose how they make contributions. Keep in mind that SIMPLE 401(k)s must be established any time between January 1st and October 1st. The October 1st deadline allows employees to make salary-deferral contributions before year-end. To be eligible to participate in a SIMPLE 401(k) plan, employees may be required to work at the company for at least one year and be at least 21 years old. ### __SIMPLE 401(k) Contribution Limits__ SIMPLE 401(k)s have lower contribution limits at $16,000 for 2024 with an additional $3,500 catch-up for those over 50, versus the traditional 401(k) contribution limits at $23,000 with an additional $7,500 catch-up contribution for those age 50 or older. ## __What is a SIMPLE IRA?__ SIMPLE IRAs are similar in many ways to SIMPLE 401(k)s. Small businesses with less than 100 employees can choose a SIMPLE IRA for their retirement plan needs. An employer can sponsor a SIMPLE IRA, which allows them and their employees access to a retirement savings account that is tax-deferred, and as of 2023, SIMPLE IRAs are allowed to support Roth contributions too. Like with SIMPLE 401(k)s, SIMPLE IRAs have certain employee contribution requirements. You the employer must make either a: - Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or - 2% nonelective contribution for each eligible employee SIMPLE IRAs have most of the requirements of SIMPLE 401(k)s, with employees being 100% vested and contribution restrictions. However, SIMPLE IRAs allow employers who make 3% matching contributions to adjust the percentage to less than 3%, but no less than 1% for two out of every five years. If you compare a SIMPLE IRA vs a SIMPLE 401(k), because SIMPLE IRAs are indeed IRA accounts, they don’t have access to 401(k) features such as loans. This makes end of year plan administration a bit easier, as there is no filing requirement for the SIMPLE IRA. Participants can still take distributions, but, unlike a 401(k), there’s a 25% penalty if a participant makes a withdrawal within the first two years of their IRA account. This is in addition to the 10% tax for early withdrawal before the age of 59½. Also, there is no age or service requirement for the SIMPLE IRA. Instead, any employee who earned at least $5,000 during any two preceding years and is expected to earn $5,000 in the current year must be allowed to participate in the plan. A SIMPLE IRA can be established at any time between January 1st and October 1st if an employer has not previously sponsored a SIMPLE IRA. If the employer did previously sponsor a SIMPLE IRA, a new plan can only be started on January 1st. After establishment, SIMPLE IRAs must run on a calendar year basis. However, as of 2024, thanks to new Secure ACT 2.0 regulations, a company can now convert their SIMPLE IRA to SIMPLE 401(k) or a Safe Harbor 401(k) during the year versus waiting until January 1st. If a business wants to terminate its SIMPLE IRA plan, it must do so at the end of the calendar year. Employers must notify the financial institution that it wishes to terminate the agreement and employees must be notified on or before November 2nd that the SIMPLE IRA will be discontinued. ### __SIMPLE IRA Contribution Limits__ Simple IRAS have the same contribution limits as SIMPLE 401(k)s at $16,000 for 2024 (with an additional $3,500 catch-up for those over 50) versus the traditional 401(k) contribution limits at $23,000 with an additional $7,500 catch up contribution for those age 50 or older. ## __What is a SEP IRA?__ This type of retirement plan enables employers to make optional contributions on a tax-deferred basis. Contributions must be disbursed to all eligible employees, and only the employer can contribute to the plan. Whether you’re self-employed or have employees, a SEP IRA is something you can consider. SEP IRAs don’t have some of the features that make 401(k)s so popular, such as loans, hardship withdrawals, or vesting schedules. SEPs are also not subject to non-discrimination testing due to their design. In determining the company contributions, you can include up to 25% of the employee’s total compensation (limited to $345,000) not to exceed the annual limit (which is $69,000 for the 2024 tax year). There's no catch-up contribution at age 50 and older for SEP IRAs. Because SEP IRA contributions are optional each year, businesses with unpredictable incomes may find this plan to be a good fit, as they may not always be able to meet these contribution requirements. If this is a requirement for you, 401(k)s can also be designed to meet this potential need and still enable employee contributions in years it may not provide an employer contribution. Employee eligibility for a SEP IRA plan includes those who are 21 or older, have worked for you for at least three of the past five years, and have earned a minimum of $750 in 2024. Businesses who have a SEP IRA can terminate the plan at any time, and although it is a good idea to notify employees of the termination, there is no strict requirement to do so. ## __Determining Which Retirement Option is Right for You and Your Business__ Unlike a decade or two ago, there are few reasons to truly consider a SEP IRA, SIMPLE IRA, or SIMPLE 401(k) over a 401(k) plan. 401(k) regulatory changes have addressed most of the reasons SEPs and SIMPLEs were created such as: 1. 401(k)s plans using the Safe Harbor design automatically satisfy IRS testing requirements. It does require a 3% or 4% vesting match in most cases, which is similar to SIMPLE IRAs and SIMPLE 401(k)s. 2. 401(k) plans don’t require an employer match, so a business that may not match one year but does the next year can leverage 401(k) profit-sharing to meet this need. Plus, unlike a SEP IRA, employees can continue to contribute to the plan regardless of what the business decides. 3. The cost of 401(k)s used to be notably more than SEPs and SIMPLEs. Today, there are low-cost providers, and material IRS tax credits, when applied, can cover the costs of a 401(k) for the first three years of the plan. There are even tax credits for employer contributions, plus it’s tax deductible ongoing. When you consider the flexibility and advantages of a 401(k) over SEPs and SIMPLEs, you can see why 401(k)s truly are preferred in most scenarios: - Highest contribution limits for employees and equal overall limit with SEPs. - Highest catch-up contributions for employees that are 50+ years of age. - Greatest flexibility in determining whether you want to provide employer contributions and in the choices you have if doing so. - Easiest access to monies in an emergency with 401(k) loans or hardship withdrawals if needed. - Vesting options for those using as a retention tool. - Scales as your company scales with no employee limits. - Includes robust features such as automatic enrollment and auto-escalation can help more employees participate and contribute more to build a meaningful nest egg. ## __Key Takeaways:__ 1. SIMPLE (Savings Incentive Match Plan for Employees) 401(k)s, SIMPLE IRAs, and SEP (Simplified Employee Pension) IRAs are retirement plans built with the intension of simplifying the process of setting up and funding a retirement savings account for you and your business. Many of these advantages have been eliminated over time with changes in regulations for 401(k) plans 2. SIMPLE 401(k)s and SIMPLE IRAs have lower contribution limits compared to 401(k)s. While SEP IRAs have a higher contribution limit, all funding is provided by the employer and none by the employee. Employer contributions are optional each year which can prevent employees from building enough for retirement. 3. SIMPLE 401(k)s and SIMPLE IRAs are limited to less than 100 employees while there is no employee limit for 401(k)s and SEP IRAs. 4. SIMPLE 401(k)s, SIMPLE IRAs, and SEP IRAs are stripped down versions of 401(k) plans, and lack some features such as 401(k) loans, hardship withdrawals, vesting schedules, and profit-sharing options native to 401(k)s. 5. There is limited to no cost savings with SEP IRAs and SIMPLEs versus a 401(k) due to more low-cost providers in the space and small business IRS tax credits and deductions. *ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.* *Loan balances must be paid off in five years and if you leave your job, you may be required to pay back the full balance within a short-time frame or pay penalties and taxes. Most important, borrowing from your 401(k) can significantly reduce your retirement savings.*