Saving for retirement is not always easy. It requires self-discipline and careful planning. One of the decisions that you must make is whether you should use an IRA or a 401(k) retirement plan. Business owners also need to consider which option their average employee is likely to want, if they want to encourage high employee satisfaction and retention.
Deciding which plan to offer requires the business owner or human resource director to take a careful approach to looking at the benefits and drawbacks of different types of plans. It is always wise to consult a professional retirement consultant for assistance when making major decisions. But if you are starting your research on 401(k) or IRA retirement plans, keep reading to learn some of the in’s and out’s of each type of plan. Understanding the structure and purpose for each type of plan may help you decide which direction to take your business in.
The Basics: What is an IRA or a 401(k)?
Both and IRA and a 401(k) plan allow you to put money away to save for retirement. The money does more than just sit in a bank account, however. Each plan is invested in the market, and it provides a return based on a combination of investments. Where the sum is invested (in terms of funds) varies and is based upon the specific plan elected. In many cases, retirement accounts invest portions of the investment into a diversified portfolio in order to encourage a better yield.
Considering Age & Risk
There are some important factors to consider when choosing a plan such as age and the amount of risk that accompanies the plan. The investor’s age will play a significant role in what type of investment is involved as well and how much risk they can reasonably accept.
For example, young investors have many years to save, so they may have their investment in a higher-risk, but higher-yield plan. Both options usually allow the individual employee to turn their risk tolerance up or down, but this is not the case in all plans. Look over the terms carefully if you would like your employees to understand control how much risk they can accept.
Setting up a 401(k) or IRA Plan For Your Employees
A 401(k) plan is only offered through an employer. In some situations, business owners have the option of automatically enrolling all of their employees. Employers may also be able to set up automatic contribution increases as well, essentially ensuring that employees are saving for retirement.
The amounts are deducted through their paycheck and are made pre-tax. That means that the employee cannot deduct the amounts that they contributed to a 401(k) plan on their taxes. Roth 401(k) plans, however, are made after tax, so the contributions are tax deductible.
Understanding IRA Plans
Traditional IRA plans are never set up to automatically enroll employees. In fact, IRA accounts are generally not associated with an employer. However, Roth IRA plans are commonly utilized by small business owners for their personal finances and small businesses can set up an IRA plan for their employees, called a SIMPLE IRA.
This option is usually offered through the small business’s financial institution, and they will administer the plan as well. In this type of plan, payroll deduction is also an option. Like the 401(k), this plan contributes pre-tax dollars. Roth IRAs are also available.
Differences Between Offering a 401(k) Plan or an IRA
In a 401(k) plan, employers can choose who can participate in the plan. Usually, employers will require employees to work at their company or business for a certain amount of time before they can take advantage of the benefit of having a 401(k). The only available offer for businesses to set up an IRA for employees is through the SIMPLE IRA for small businesses. Otherwise, IRAs are set up by the employees on their own as a private retirement plan. That means that if you do not qualify for the SIMPLE IRA, then offering an IRA is most likely not an option for your business.
When Can Employees Take Distributions?
As an employer, you may wonder when your employees can begin to draw from their accounts. Under either a 401(k) plan or an IRA, employees can generally start taking withdrawals when they turn age 59 ½, although this can vary by the plan. There are also sometimes tax advantages that can be discussed with your tax advisor.
If you offer a 401(k) account to your employees, you may also be able to place additional restrictions on the account as an employer as well – as long as the employee is still working for you. If you want that type of control, a 401(k) is a good option for your business.
Are There Limits on Contributions?
For high income earners, the limits on contributions may be an important consideration. In an IRA, individuals are limited to contributing $5,500 per year. If you are over 50, this limit increases to $6,500. You must stop making contributions when you hit 70 ½ as well.
In a 401(k) account, the contribution limits are much higher—up to $18,000 in a single year. Those over 50 can also contribute an additional $6,000 as well.
Let us Help you Find the Right Plan!
Each business has differences, but each will want to offer a retirement plan that fits their employees’ needs. Finding the right plan will really communicate to employees how much you value them. The Business Benefits Group has extensive experience helping owners and businesses of all sizes get organized for retirement. We can help you identify the best plan structure for your organization and even offer unique custom strategies that can be tailored to fit your needs even more closely.
Schedule a Complimentary Consultation Today
Talk with an experienced benefits consultant or retirement consultant for more specific information on BBG’s valuable services by sending BBG a message online or by calling us today. We offer informative consultations that will help you understand your options and how best to move forward.