Why Adopt a Company 401(k) Plan Instead of My State’s IRA Program?

United States map showing state IRA programs

There are many reasons why a business should adopt a 401(k) Plan instead of a state-administered IRA program.  Let’s review the benefits of a 401(k) versus the state programs.

  • Helping your employees save for retirement is a great reason to establish a 401(k) Plan. After all, that’s the whole idea behind the state programs.  Statistics state that as of March 2021, 32% of private-sector workers did not have access to a retirement plan sponsored by their employer.*
  • Flexibility and the ability to have control of a 401(k) Plan for you and your employees are great benefits. You lose those benefits in a state program.  There are no options.  In a 401(k) plan you can offer pre-tax and Roth deferrals, can provide discretionary employer contributions, offer loans and other distribution options.  The state programs are targeted more directly at employees.  Establishing a 401(k) plan allows you, as the Plan Sponsor, to work with a Third-Party Administrator to design a Plan that meets your goals.
  • Contributions in the state IRA programs are limited. Currently the individual limit to an IRA is $6,000.  In a 401(k) Plan, an individual can contribute $22,500 in the form of pre-tax or Roth deferrals.  That’s a huge difference.
  • Having a 401(k) Plan in place for your company helps attract new talent and retain existing employees. It may be the deciding factor for the employee you are recruiting to accept your offer of employment.
  • Tax credits – You may be eligible for a tax credit of up to $5,000 a year, for up to 3 years, just for starting a 401(k) plan. The credit is to help employers offset plan costs to set up and administer a new plan.  There are no tax credits in the state programs.
  • Tax deductions – Employer contributions are tax-deductible and not subject to Medicare or Social Security tax. There are no employer contributions allowed in the state programs.  It’s true that you generally are not required to fund an employer contribution, but what if you want to?
  • Maybe your company had a great year, and you have a profit that you’d like to contribute to the 401(k) plan to benefit you and your employees?  Great idea!  This contribution will reduce your employer taxes and boost employee loyalty.

These are just a few of the benefits of a 401(k) plan.  Now add in an investment line-up chosen by a leading 3(38) fiduciary and plan design consulting from a TPA.  You’re on your way to provide a great 401(k) plan!

* Source: https://crsreports.congress.gov


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