Small Business 401ks

Written by Jacey Harmon
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Small business 401Ks were created by the Economic Growth and Tax Reconciliation Act (EGTRA) of 2001. Prior to the changes enacted by EGTRA of 2001, 401K plans were cost prohibitive for most small businesses. Some estimates project that over 17 million people will be able to utilize small business 401Ks.

Unlike traditional 401Ks, small business 401Ks are not subject to strict rules and regulations. For instance, small business 401Ks are not subject to complicated discrimination tests, allowing for smaller administration costs. The large administration cost was one of the prohibitive factors regarding small businesses utilizing the 401K plan. Small business 401Ks are cost efficient tools when planning for retirement.

Small Business 401Ks Are Highly Flexible with Higher Contributions

Small business 401Ks are more flexible than other retirement funding vehicles like the Keogh plan. Contributions to small business 401Ks are completely discretionary whereas they are mandatory for Keogh plans. Funding amounts may vary from year to year for small business 401Ks. Since profitability margins of many small businesses vary from year to year, flexible contributions are an attractive aspect of these plans.

Small business 401Ks may allow for contributions up to $41,000 annually in some instances. Compared to $13,000 annually for a traditional 401K, these plans can provide quick accumulation of funds. The funding limit varies from situation to situation depending on profitability of the business. A financial consultant experienced with small business 401Ks will be able to help determine your specific contribution limit.

Small business 401Ks have tax benefits common to most qualified retirement plans. Contributions are tax deductible, reducing taxable income while saving for retirement. The account grows tax deferred meaning the portfolio grows without paying annual capital gains taxes. The tax deferred growth is a great benefit as it allows for maximum growth potential of the portfolio.

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ira verus 401k

Great post Jacey! I'm trying to decided between setting up an ira or a 401k for my small business. We are a small E-commerce company with 7 employees, and do a lot of our work in-house. I've done a little bit of research on the subject of ira versus 401k through and understand that with an ira benefits plan the employees make more of the investing decisions. Are there any other differences beside that?