The Small Business 401(k) is the Holiday Gift That Keeps on Giving

This time of year, a lot of small business owners begin the annual process of planning for the holidays — picking out greeting cards for clients, booking a party for employees and asking the age-old question, “Can we afford to give out any bonuses?”


And while the idea of handing out cash to employees may seem far-fetched and costly these days, it’s actually very doable and affordable when packaged and gift-wrapped as a 401(k). First and foremost, you are helping you and your employees prepare for retirement. Secondly, any matching contributions or profit sharing contributions from the employer to employees are tax deductible for the business. But that’s really just the start.

The Benefit That Keeps on Giving and Can Pay for Itself

There’s no doubt about it, giving each of your employees a fat check around the holidays would feel great. But, in the long-term, giving them free money every two weeks — via matching contributions to their 401(k) — can actually work out even better for both you and your employees. And, for smaller firms, the plan may actually pay for itself outright.

Here’s how 401(k) saving and tax advantages can really add-up. Consider a scenario of two businesses. Each has seven employees including the owner, and the owner earns $150,000 a year. One offers a 401(k) plan with a “safe harbor” match to maximize her contributions and one does not provide a retirement plan at all.

So which owner keeps more of her money? In this situation, the owner with the 401(k) is much better off than the owner without a plan. The owner with a 401(k):

• Keeps $2,729 more of her own money
• Pays $7,465 less in personal and business taxes
• Saves $22,087 in tax-deferred income for retirement

That’s just year one. Take a ten year view, and the numbers get even more exciting. The owner saves nearly $75,000 in taxes and builds a nest egg $305,000 assuming a seven percent annual return over the period. Tax credits, deductions of any match and plan expenses, and matching can all have powerful effects on your bottom line.

Small business 401(k)s are in everyone’s best interest and bottom line. Now that’s a concept that even Scrooge could love.

Source: http://www.forbes.com/sites/stuartrobertson/2011/11/18/the-small-business-401k-is-the-holiday-gift-that-keeps-on-giving/