Instruc(k)tions #004: The Start-Up 401(k)
June 19, 2024
Read time: 3 minutes
Starting a 401(k) plan is a great idea.
In fact, the government is pushing for small business owners to start retirement plans. In due time, the benefits offered by Social Security are not going to be able to pay out at their current rates. Where are retirees to turn for income?
Hopefully their retirement plan…if they have one!
How does someone save for retirement if their employer doesn’t offer a plan?
An IRA is typically the only route.
Studies show actively employed individuals need to save 13-15% of their salary to set themselves up for a successful retirement. This may not be achievable in an IRA based on the limits. The employees need an employer sponsored plan.
Our government is trying to help.
The state run plans.
States are stepping up mandating (in some states) businesses start a plan.
The state run plans are helping, barely. These plans are glorified Roth IRAs requiring auto enrollment and business owner time to administer. The states have very little service and are sometimes more interested in collecting fees for non-compliance then having support for the business owners with questions.
But, the federal government is also trying to help.
SECURE 2.0 Tax Credits
To entice a business owner to start a plan, the federal government passed SECURE 2.0 in 2022 and added a bunch of tax credits to assist.
It is possible to start a plan today and wipe out all administrative fees for the first three years. Additional credits are available to further benefit the business owner. The federal credits far outweigh what the states have attempted to do.
You can read more about the credits here: Starting a Plan for FREE
How does this help the employees?
The 401(k) has contribution limits about 3x higher than an IRA.
Additionally, most plans will allow for a company match and even a discretionary profit-sharing contribution. An employee will have the ability to achieve the 13-15% savings rate between their own deferrals coupled with a generous company contribution. Finally, there are tax credits available to the business owner for automatically enrolling their eligible participants.
Automatic Enrollment is an another strategy forcing employees save.
Does automatic enrollment help?
In short, YES!
Traditionally the 401(k) plans were opt in and this resulted in lower enrollment rates. Now, beginning in 2025, all plans with more than 10 employees will be opt out, meaning automatic enrollment is required at 3% of salary or greater for each eligible employee. For the same reason enrollment rates were low, this rule will spike enrollment rates…why?
Studies show people are lazy and instead of doing something like enrolling (in the past) or un-enrolling (in the future), they will choose to do nothing…good for the future!
Why start a 401(k)?
Three reasons.
1. Avoid the state-run plan.
2. Tax Credits offset fees for three years.
3. Help your employees (and yourself) save for a successful retirement…a benefit all new hires seek.
Your client will sing your praises for your assistance.
Whenever you’re ready, there are 2 ways I can help you:
1. For tips on Retirement Plans follow me on LinkedIn: @drewtirney
2. Free client/prospect consulting to add new business to your book: drew@401kinabox.com
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