In 1978 two important things happened, Garfield, the Cat, debuted on newspaper comic strips and the IRS established section 401K to the internal revenue code. Section 401K of the IRS code allowed employees to make tax-deductible contributions to an Employer-Sponsored Defined Contribution Plan.
How 401k works:
An employer establishes a 401K plan that suits the needs for the business, owner and the staff. Once the setup and design are over, and the plan is installed, eligible staff and the owner can begin making contributions to the 401K via payroll deductions. Participants may elect a percentage of their gross paycheck or a dollar amount to contribute to the 401K. That amount is withheld from the participant’s paycheck and remains at the employer’s bank, the employer is then responsible (and legally obligated) to remove those funds and deposit them in the individual accounts of each participant. The participant not only chooses the amount that they would like to invest, but they also select what their monies will be invested in. Most 401Ks have several investment options for the participant to choose from. In recent years participants can elect to make pre-tax (Traditional) AND/OR after-tax (Roth) contributions. See my blog posts about Roth IRAs and Traditional IRAs for a reminder of the difference of the contributions.
Why would an employer want an Employer-Sponsored 401K?
-Any business (s-corp, c-corp, sole prop, partnership, self-employed) can set up a plan to help participants save for retirement.
-Attract, retain, and motivate great staff with the opportunity to save for retirement and potential get a match or portion of saving from the employer.
-401Ks have large contribution limits that are not affected or capped by high income like other retirement vehicles.
*2018 Contribution limits were $18,500 for individuals under 50 years of age and $24,500 for those over 50yrs. In 2019 they increase to $19,000 and $25,500.
-Contributions can be tax deductible, potentially avoiding the higher tax bracket of your working years to a lower tax bracket in retirement
-Tax advantages for an employer for setting up and maintaining a 401K for owner and staff.
-Several investment options
401K’s have proven to be popular amongst owners and staff for several reasons, but they are subject to numerous and complex rules, regulations and tax qualifications. Be sure to consult with a qualified professional before making any decisions. If you have any further questions please feel to reach out to me at 913-681-9155 or Taylor@engageadvisors.com
Taylor Richardson – Chartered Retirement Plan Specialist®
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