Many small business owners are hesitant to open 401(k)s for their employees. They might believe the costs associated with offering retirement benefits would better serve the company in other ways. However, a 401(k) plan is actually one of the best ways to boost profits all while giving employees a reason to stay in the company.
Check out the top reasons to offer a 401(k) to your employees.
1. Score tax breaks for you and employees
A 401(k) plan might offer tax benefits to your employees. The income they contribute to a 401(k) doesn’t count toward their income tax returns. 401(k) contributions are tax-deferred, meaning the employee won’t have to pay taxes on the retirement funds until they’re withdrawn from the account. The more money they save, the less they’ll have to pay in taxes every year. Employees will pay fewer taxes in the long run because they’re more likely to be in a lower tax bracket upon retirement.
Small businesses that offer 401(k)s to their employees might also qualify for tax credits. Employer contributions are tax-deductible because they’re considered business expenses. Small business owners who just opened 401(k)s for their employees are also eligible for tax credits through the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The act offers tax credits up to $5,000 for the first three years of the retirement plan.
Business owners are allowed to participate in the same 401(k) plan available to their employees. Depending on how your business is set up, you might be able to lower the company’s tax burden by contributing a significant portion of income to your personal 401(k) account. Storing profits in a 401(k) can reduce how much in federal taxes the company owes every year. Owners can also lower the tax bracket through profit-sharing contributions. This method defers extra profit to the employees’ 401(k)s to reduce the owner’s taxable income.
2. Increase employee loyalty and satisfaction
Retirement benefits incentivize employees to stay with your company for the long haul. Employees who stick around reduce your turnover rate and save you money on finding replacements. One study revealed that replacing an employee can cost between 29 and 46 percent of that employee’s salary. The cost of starting a 401(k) plan is far less than losing valuable employees to your competitors.
A 401(k) plan is an effective way to boost productivity and employee satisfaction, too. Employees are more willing to work hard for a company when the owner invests in their retirement. They’re motivated to earn more money, which directly translates into more profits for the business.
3. Fund startups and business growth
A small business owner can also use an existing 401(k) account to inject capital into their company. Once you establish a qualifying 401(k) plan, you can rollover and invest the funds in your business using a Rollover as Business Startup (ROBS). A ROBS account is a tax-deferred, debt-free funding source you can use to fund a new venture or expand your current business.
A 401(k) plan does more than set up employees for retirement. Offering 401(k)s in your company can help you retain loyal talent, lower taxes and provide funding for business growth.
Tenet Financial Group can walk you through the steps of a 401(k) rollover for ROBS and help you secure additional sources of capital. Contact us today to get started.