The 401(k) feature of a profit sharing plan is one of the most popular types of plans, allowing employees to make contributions to their retirement accounts, while providing tax savings. More importantly, contributions are made by payroll deductions and employees can choose the contribution level that works best for them, providing an easy and convenient way to save for retirement.
- No employer contributions required
- Employer contributions are discretionary
- Helps attract and retain qualified employees
- Employee participation is optional
- Several design options including Safe Harbor and Roth
- Many types of investments, including mutual funds and ETFs
Employee Contributions: Employees can make pre-tax salary deferrals, rollover contributions from IRAs and other qualified retirement plans, and catch-up contributions.
Employer Contributions: Employers can make tax-deductible contributions on behalf of employees. Employer contributions can either be matching contributions or discretionary profit-sharing contributions.
Benefits of a 401(k) Plan
- Great Retirement Savings Tool. 401(k) Plans provide a disciplined and convenient means to help employees save, which encourages them to plan for a secure retirement.
- Employee Recruitment & Retention. 401(k) Plans are popular with both employees and employers. They are widely utilized to help companies attract and retain good employees.
- Tax Savings. 401(k) Plans offer tax savings to both employers and employees. Employers receive tax deductions for making contributions, and employee salary deferrals are made before federal income taxes are withheld. All contributions grow on a tax-deferred basis.