The decision to offer additional benefits to your staff can be a difficult choice. You want what is right for your employees, what is easiest for you to manage and what is most cost effective.
There are benefits with both 401(k) and IRA plans, and they can be more affordable (and beneficial) than you may think. There are tax deductible contributions, tax credits for starting the program, and the positive aspect of retaining and hiring of employees.
What is a 401(k)?
This is a form of profit sharing that requires a pre-tax contribution on the part of the employee. The 401(k) can also have a contribution on the part of the employer. The programs usually allow for a set amount to be contributed on the part of the employer, depending on the number of years an employee has been with the company.
This type of plan will allow for withdrawal or roll-over if the employee should leave the company, but there are often penalties or waiting periods associated with it.
This is an excellent option for companies with a large number of employees, although there can be a large amount of paperwork to maintain the accounts, including managing and preparing the filing of 5500 tax paperwork.
What is an IRA?
Short for Individual Retirement Account, this is a savings program that allows money to be set aside for retirement. There are two basic types of IRA programs, the SEP, or the Simplified Employee Pension Plan and the Simple IRA, the Savings Incentive Matching Plan for Employees. Both of these plans are best suited for smaller companies, as they are easier to maintain and easy to set up.
If you're a small business owner, this video might be of particular interest to you as you plan for your retirement and look for ways to minimize the amount you pay in taxes:
The SEP allows employers to set money aside for their employees retirement, while the Simple IRA allows for both employee and employer contribution to the retirement plan. Both plans allow more flexibility on the part of the employer and the employee, deciding from year to year how much to contribute. There is less paperwork to manage because of the tax-free until retirement status, although there will be paperwork and penalties for early withdrawals or rollovers.
If you would like more information regarding setting up a retirement plan for your employees, please feel free to contact our office.