When it comes to retirement, an employer-sponsored plan can play a major part in helping Americans reach their retirement objectives. The most familiar form of company-sponsored plan for most people is the 401(k). Taxation on Company-sponsored 401(k) plans is similar to Traditional IRAs. Salary reductions which are contributed to the plan are invested on a pre-tax basis, providing a current-year tax reduction. The money in the 401(k) will be taxed at ordinary income when withdrawn after age 59 1/2. Withdrawals prior to 59 1/2 generally pay income taxes and a 10% early withdrawal penalty. Required withdrawals from a 401(k) must begin by April 1st of the year after the participant turns 70 1/2.
Many company-sponsored 401(k) plans offer an employer match which can add to the amount of contributions to the plan and no out-of-pocket cost to the employee. It is important to understand your company’s matching program so that you are making use of this benefit whenever possible.
Some company plans offer the Roth 401(k) option. This option does not allow the salary reduction into the 401(k) to be tax-deductible but does offer the benefit of tax-free withdrawals at retirement.
To qualify for the tax-free, penalty-free withdrawal of earnings, a Roth 401(k) must be in place for at least five tax years, and the distribution must take place after age 59 1/2 or due to death or disability. Before taking any specific action, be sure to consult with your tax professional.
An additional retirement savings option for small business owners is the Single-Participant 401(k) Plan, also called a Solo 401(k). The Solo 401(k) was created in 2001 and is similar to a traditional 401(k) plan but is designed for a self-employed individual and generally is simpler administratively. The Solo 401(k) plan is only available to an individual business owner and his/her spouse. Part-time workers that work less than 1,000 hours per year are excluded. Businesses with non-owner/spouse employees will need to select a different retirement plan.
Participants are always fully vested in the value of their plan contributions. The percentage of employer match available will vary depending upon years of service.