It is very uncommon for a startup to offer 401K to its employees. In fact, only 10% of small business or startup companies offer 401K to their employees. The usual size of these companies is 1 – 100 employees.

Key Takeaways

  • 90% of small business or startup companies don’t offer any type of retirement plan for their employees
  • Startup companies that offer the 401K plan have an employee size of 1 – 100
  • Employees can contribute to the 401K plan
  • 401K plan offers the employees a tax break on the amount that they contribute towards the plan
  • The annual contribution limit of the 401K plan for the employees is $20,500; if the employee’s age is over 50 then the limit is $27,000    
  • An employer decides who is eligible for the 401K plan
  • 76% of employees consider retirement benefits options while looking for the future job

What is a 401K?

According to Wikipedia

“In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their paychecks and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers.”

This is a type of pension plan where the employees can also contribute and minimize the risk of financial obligation after retirement. A key advantage of the 401K plan is it offers employees a tax break on the amount that they contribute to the plan. The annual contribution limit for employees in 401K is $20,500 but if the employee’s age is 50 or over then the annual limit would be $27,000. There are two types of 401K plans available. They are Traditional 401K and Roth 401K. For Roth 401K, contributions and withdrawals have no impact on income tax. But for traditional 401K, withdrawal has an impact on income tax.

How 401K Plan Works?

This type of retirement plan is eligible for employees who want to save and invest for their own retirement on a tax-deferred basis. Here, an employer can only sponsor a 401K plan for an employee. Without sponsorship from the employer, an employee can’t open a 401K plan. If the employer agrees to sponsor the plan then you have to decide how much you want to save from your paycheck and deposit to the plan. You should keep in mind that you can’t save any amount you want. There is a deposit limit and it is imposed by plan provisions and IRS rules. Employers can contribute to the plan but it is optional and totally depends on the employer’s wish. After opening the plan, it is the employer’s responsibility to run the plan in accordance with laws, rules, and regulations. Some responsibilities of an employer regarding the 401K plan are –

How 401K Plan Works?
  • An employer decides who is eligible for the plan
  • How much the employees can contribute
  • When the employees can contribute
  • How much the employer will contribute, etc.

Now, if your monthly salary is $1000 and the employer decides that you can save 55 towards the 401K plan then every month $50 will be deducted from your paycheck and will be placed in the 401k plan. So, you will receive $950 as a salary. Now if you want then you can contribute to this 401K plan. For example, if you contribute $50 then every month your 401K plan will receive $100.

Advantages and Disadvantages of 401K Plan

Advantages of 401K Plan Disadvantages of 401K Plan
The 401K plan is protected by the Employee Retirement Income Security Act of 1974 (ERISA) 401K funds have fewer investment options
Many employers offer matching contributions to the 401K plan It has a small or nonexistent company match
The 401K plan gives you a high annual contribution limit It is very difficult to access the funds before the due date
You will get free investing advice from the experienced professionals There are tax implications on the withdrawal limit
401K plan offers employees a tax break on the amount that they contribute towards the plan This type of plan has various fees
Loan option available on 401K plan There are fees and penalties on early withdrawals
High annual contribution limit available 401K plan will last until the plan runs out of money

Reasons Why a Startup Company Should Consider a 401(k) Plan

There are many options available for an employer when it comes to choosing a retirement plan for the employees. But, some key reasons make the 401K plan the best option for the employer to choose from. The 401K plan is very popular among employees. A recent study showed that more than 88% of employees prefer 401K as their retirement plan. So, among the employees, the IRAs and other retirement plans are valueless. This is why an employee checks what retirement plan the employer will offer before joining the job. So, as an employer, if you want to hire the best employees then you should offer the 401K plan. In fact, 76% of employees consider retirement benefits options while looking for a future job! So, it is very important for a startup company to offer a 401K plan for the employees. Moreover, the Retirement Enhancement (SECURE) Act has made the 401K plan more reasonable for startup companies. If a startup company offers a 401K plan to its employees then the business owner will get a $5,000 tax credit for three years!

Reasons Why a Startup Company Should Consider a 401(k) Plan
Reasons Why a Startup Company Should Consider a 401(k) Plan

The Average 401k Balance by Age

Age Average 401K Balance Maiden 401K Balance
<25
25-34
35-44
45-54
55-64
65+
$6,718
$33,272
$86,582
$161,079
$232,379
$255,151
$2,240
$13,265
$32,664
$56,722
$84,714
$82,297

The average Personal Capital User for 401k Savings

Age Average 401K Balance Maiden 401K Balance
22-24
25-34
35-44
45-54
55-64
65+
$27,544
$88,142
$224,411
$436,528
$586,486
$469,702
$9,647
$40,714
$106,271
$204,900
$270,698
$137,468

401k Savings Potential by Age

Age Years Worked No Growth 8% Growth
22
23
24
25
30
35
40
45
50
55
60
65
0
1
2
3
8
13
18
23
28
33
38
43
$0
$8,000.00
$28,500.00
$49,000.00
$151,500.00
$254,000.00
$356,500.00
$459,000.00
$561,500.00
$664,000.00
$766,500.00
$869,000.00
$0
$8,000.00
$29,140.00
$51,971.20
$196,628.06
$409,176.45
$721,479.77
$1,180,355.80
$1,854,595.24
$2,845,274.18
$4,300,906.56
$6,439,708.09

References:

https://www.nerdwallet.com/article/investing/what-is-a-401k

https://www.personalcapital.com/blog/retirement-planning/average-401k-balance-age/

This content was originally published here.

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