Is setting up an independent 401(k) plan always better than an IRA for a small business?

When setting up a small business with only a few partners and employees, is it better to set up independent 401(k) plans for everyone or should they each open an IRA account suitable for their situations? If the 401(k) option is best, what kind of plan should be chosen or offered? If IRA's, Roth or Traditional? How can you set these up so that they are immediately available for contributions to be made?

401(k), IRAs, Small Business
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August 2017
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It really depends upon how much everyone plans to contribute & if the company plans to match.  If you are looking to put in more than the IRA limits of $5,500 or $6,500 if 50 or older then the 401k is a better option because an employee can withhold up to $18,000 or $24,000 if 50 or older with the catch-up provision.  Plus if the company (the owners) so choose, they can add a matching element.  This could vary to somewhere around a 3%+ match all the way up to a Profit Sharing where you could put in much more up to $54,000 or $60,000 if 50 or older based upon a percentage of salary.  If you have only a few non-owner employees, this becomes very attractive.

So again, it depends upon what you are trying to accomplish.  IRAs are simpler but much less flexible regarding contributions.  Regarding Roth versus before tax, you can still offer either components if you like.  Really depends upon whether you want to pay the tax now for potential future tax-free income or tax the deduction now.  Generally, the younger you are and the lower your tax rate, the more a Roth IRA or Roth 401k becomes.  This is because the tax deduction isn't as valuable and you have more time to compound inside the retirement plan. 

Hope this helps and best of luck, Dan Stewart CFA®
 

August 2017
August 2017
August 2017
August 2017