How to Know Your Business is Ready for a 401(k)

You probably already know that when it comes to saving for retirement, starting earlier is better. You may also know that 401(k) retirement plans can offer powerful tax and employee morale benefits. But when it comes to your small business, you might wonder when it makes sense to start offering a 401(k). Here are five signs that your business may be ready for a 401(k) plan.

Step 1

Your Business Has Reached a Financial Milestone

When you established your business, your primary concerns were likely paying the bills and growing your customers and sales. Once on firmer ground, it could be a great time to offer retirement benefits for you and your employees. Whether you’re a well-funded, venture-backed startup or have recently hit a big revenue milestone, now is the right time to start a plan.

Retirement benefits needn’t put a strain on you budget either. At ShareBuilder 401k, expenses typically associated with a plan of 1-10 employees include a one-time setup price of $495 and a $95 monthly administration charge, much of which can typically be offset with tax credits and/or tax deductions.

Insight: If your business ever has financial difficulties, know that monies in your 401(k) account are typically protected from creditors.

Step 2

You Haven't Started Saving for Retirement yet

Most people don’t want to work forever, and for those that do, some may not have the option. And while many small business owners may plan to sell their business to fund their retirement, it’s estimated only 20%1 are actually able to sell their business. Even for owners that are able to sell their business, the money they receive may not be enough.

The reality is that if you don’t start saving for retirement, you can be pretty sure you won’t have enough money to retire when you want. Experts suggest that you need to save 10%-15%2 of your income over a 40-year career to retire at your current lifestyle. If you haven’t started saving for retirement yet, there still is time and the sooner the better.

401(k)s offer higher contribution limits compared to IRAs. However, if you or at least some of your employees aren’t planning to put at least $7,000 into a 401(k) per year, a traditional IRA may be a better fit for you.

1’s Second Quarter 2018 Insight Report:

2 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.

Step 3

You Have an Immediate Need to Better Manage Taxes

You can lower your taxes this year by contributing up to $23,000 tax-deferred into your 401(k) account. For those at least 50 years of age, you can contribute and lower your taxes by up to $30,500.

If you are concerned about your future tax rates, the Roth 401(k) feature allows you to save up to $23,000 after-tax regardless of your income. This amount is more than three times greater than a Roth IRA which also has income restrictions.3 Since this money has already been taxed, you will not need to pay taxes when you withdraw it in retirement.

You may also lower your company’s business taxes by selecting a profit share option for you and your employees. Your profit share is tax deductible and may lower your business taxes for the year.

3 In 2024, the contribution amount allowed begins to decrease at $146K for single individuals, hitting $0 at $161K. For those filing jointly, the contribution limit begins to decrease at $230K, hitting $0 at $240K.

Step 4

You're in a Competitive Marketplace for Employees

It can be frustrating to lose a valuable employee to a larger firm with better benefits, and it can be tough to win over new talent when other firms offer strong benefits. A ShareBuilder 401k is a great benefit that helps put you on a level playing field with large companies and gives you a competitive edge against other small businesses competing for the same talent. The cost of employee turnover can also add up between recruiting, training, and other inefficiencies your business may experience in backfilling.

Step 5

You Want to Reward Current Employees and Keep Your Best Talent

You’ve invested in your employees and you understand that their roles and customer relationships are key to the continued growth and success of your business.

As your employees begin to build families and plan for the future, benefits like 401(k) plans become even more important to them. By providing benefits that allow your employees to plan for their futures, it can help with ongoing morale and loyalty so they stay with your company for the long-term.

Ready for 401k