Many small businesses offer a pension plan, called a 401(k) plan. Understand how to protect and grow it.
It is named after the related section of the Internal Revenue Code.
But, with all the uncertainty in today’s investment markets, many employees either do not enroll and contribute to their plan, or contribute a very small amount out of fear or lack of knowledge. What many employees do not realize is that most plans have a required employer match, that could give you an automatic 60% return on your investment.
Also, a number of employees do not understand investments, so they pick a fund, and just ride it annually with no consideration for what it means. Yet, there are others who simply never look at their statements or go online.
The money representing their 401(k) contribution is withheld from their checks, and they just “assume” that there will be money there when it is time.
If you are one of those employees, this article is for you here are three things you need to know as a small business owner:
1st, understand that most 401(k) plans are a great benefit!
Employers often will match up to 3% of your first 5% of your contribution. This is called a “safe harbor” match.
It means that the employer will not be punished by the IRS for discriminating against lower paid employees, and in fact the IRS will grant them an automatic assurance that the plan will get favorable tax treatment as being fully tax deductible for being so generous to all employees.
The 3 to 5 ratio is also where you get the advantage of a 60% automatic return. Of course, the employer contribution is not always guaranteed money.
In most businesses, if you quit or get fired before you worked for 6 years, you may forfeit some of that employer contribution. That is simply a rule that gives the employer a sense of commitment from the employee. So, you do not have to be an investment genius to make money on your pension. And it gets better.
Since the IRS lets you take a deduction for the 401(K) money you take out of your paycheck, you might be saving ( or deferring) another 25% or more on your taxes, all while you put money into your 401(k) long term savings program. So, this is a winning proposition.
Younger people generally make out the best, if they start this tax deferred savings program while they are young, because of the power of “compounding”.
Next- 2nd- Demonstrate a little care for YOUR MONEY and 3rd- Being an Investment Guru
About the author
Raymond M Nowicki CPA is managing partner of Nowicki and Company, LLP, a firm with its headquarters in Buffalo, NY with a satellite in Manhattan. Nowicki is a nationally recognized speaker and trainer of CPAs on pension plan auditing, and quality improvement for CPA practices. His firm also audits 401K plans. Ray has helped Nowicki and Company, LLP grow to be one of the top 30 firms in Western New York. In recognition for service to small businesses, New York Governor George Pataki awarded him the Small Business Advocate of the Year Award in 2005. He serves most of the firm clients, especially in a number of specialized areas including estate planning and trusteeship, structuring new business ventures, strategic planning and workouts, and litigation support.Website