401K Options For You and Your Business You Might Not Know About

Accessibility to a 401k has changed over the years but what you know about it might not be exactly true. Most of the time a 401k is talked about it’s around the conversation of benefits given at a large company but they’re available to most people business owners.

Depending on the data you’re looking at anywhere between 50 to 75% of small businesses don’t have a 401k or retirement package and most believe this because they believe they aren’t available to them.

This isn’t the case at all.

There are three options for the self-employed or small business owners that we’ll be going over. The One-Participant 401k (Solo 401k), the SIMPLE 401k, and the SIMPLE IRA. Depending on your situation one of these should be available to you. 

What is a 401k Exactly?

Generally speaking, a 401k is a retirement plan, usually provided by the employer (yourself) which is funded by the business and yourself in defined contributions. The two basic 401k plans are your Traditional and Roth plans.

There is one major difference between them. With Traditional 401k plans, you contribute before taxes which leads to you being taxed later when you retire. With a Roth 401k, it is the opposite. It pulls from your net income and you aren’t taxed from that income later in life.

These are important to have a semblance of understanding moving forward since the three plans we’re focusing on are hybrids of these standard plans.

Solo 401k 

Don’t know how else to say this but this plan is really neat!

This is the most inclusive plan on the market for entrepreneurs, allowing mostly anyone self-employed to have access to it. With this plan you are both the business owner and employee when it comes to contributions, allowing your business to match your own personal income you pull out of the business.

This gives you the freedom to alter the plan with the contributions easily depending on your circumstances at the time.

Like every 401k the max yearly amount allowed into the plan changes almost every year. In 2024 it’s $23,000 up $500 from 2023 which was $22,500.

The drawback with this option is mostly due to the fact it is a version of the Traditional 401k plan which contributions are from the gross amounts meaning you will be taxed later at retirement but the other perks may make this more favorable to you.

SIMPLE 401k and SIMPLE IRA

Both of these plans are cut from the same cloth but differ in slight ways. They are for any business of less than 100 employees and they offer the same contribution amount of $16,000 in 2024.

The biggest differences in the plans are the regulations surrounding them. The SIMPLE 401k is more like a child of the Traditional 401k since it follows many of the same laws as its parent and the employers have to file the 5500 IRS form every year. 

The SIMPLE IRA is less confined to those regulations but you don’t gain some of the benefits you would with a SIMPLE 401k. However, they are generally simpler and less expensive to set up for your company so it could be a great option for a company with a budget restraint but wants an option.

Setting Up a Retirement Plan

With the plans that we delved into, you could take the initiative yourself and get something set up. Depending on your knowledge and skill with navigating the laws of the IRS this might be a good option but for most others, a professional might be your best route.

There are certain laws and regulations that have to be followed when setting up a 401k and then maintaining it year after year that differ depending on your plan. It might be better in the hands of someone you trust. You don’t want the IRS breathing down your neck.

For anyone interested in trying to set it up themselves, you should visit www.irs.gov/retirement-plans/irc-401k-plans-establishing-a-401k-plan

The IRS website will give you information on how to establish your plan and everything you need to do to keep up with the plan.

As a final note, I’m not a financial advisor or tax professional, just someone who wants to give you ideas and tools for your success. Again I urge, if you want more information I would suggest reaching out to a trusted expert who help guide you or the IRS website listed.