Give your workers the same tax advantages that many employees of big corporations enjoy. Is a 401K Plan Right for Your Small Business Employees
The 401(k) plan is a retirement savings account that offers various wealth accumulation advantages. The two most important advantages are tax-deferred earnings and a reduction in your taxable income. The tax-deferral benefit has two parts: First you can defer taxes on the money you deposit and secondly you defer taxes on the gains you make on the deposited money. The taxes don’t disappear; you instead pay them when you take the money out of the account. Many companies offer 401(k) plans to employees as a fringe benefit and just because you are a small business doesn’t mean you can’t do the same.
Contributions
The maximum allowed contribution for 2012 is $17,000 with an allowed catch-up contribution of $5,500 for individuals 50 years of age and older. The total annual contribution including the employer’s match is $50,000. Your plan administrator will give you many opportunities to increase or decrease your per-check contribution. The deadline for your annual contribution is April 15th, right before you file your tax returns for the prior tax year. So you have until April 15th, 2013 to make your 2012 contribution.
Taking Money Out
When contributing to your 401(k) plan you must keep in mind your short-term and long-term cash needs. If you are under 59 and a half, the worst situation you could find yourself in is one where you need to withdraw money from your 401(k) plan because you need the money. If you do this, then the withdrawal is taxable and you will have to pay a 10 percent penalty as well. Depending on your tax bracket this could mean a loss of as much as 40 percent of the money you were saving for retirement.
Exceptions to the Penalties
There are some cases where you can avoid paying the penalty when you take the money out. The IRS allows you to avoid the withdrawal penalty–but not the taxes–if your distribution qualifies as a “hardship distribution.” The rules about this type of withdrawal can be complex so it’s best to work with your plan administrator and a tax advisor to avoid making a mistake.
