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The Business of Savings
Tax Breaks that Make a 401(k) a No Brainer for Your Business
Many small businesses have never taken the time to purchase a 401(k) for their company as they view the costs as too expensive. Yet, as the price of plans has fallen [typically in the $1,000 to $1,500 range for businesses of 2-15 employees – much less for solo 401(k)s] and due to the business and personal tax benefits for owners, 401(k) plans can pay for themselves.
If you’re starting a 401(k) for the first time and you have less than 100 employees, you will qualify for up to a $500 tax credit each of the first three years of your plan. That’s $1,500 over the first three years to offset set-up or administration charges to maintain your plan. To qualify for the credit, all your business needs is one participating employee, not including the owner, who earned less than $110,000 in 2008. Small businesses that choose to match their employees’ contributions can also deduct that amount as a business expense.
Now take into account the personal tax savings the owner receives who contributes the maximum of $16,500 in 2009. If the owner is in the 28% tax bracket, that is a tax savings of $4,620. Even paying for the employee match, the employer of a 10 person firm is often better off versus not having a plan at all.
Read our guide Lower Your Taxes with a 401(k) Plan for more insights including scenarios of owners who have a plan versus those that do not. You might just find it saves you a cool million for down the road!