Rethink 401(k)s: A Smart Move for Small Businesses

Joshua Potts

It's time to challenge the outdated notion that 401(k) plans are too complex or expensive for small businesses. We understand the struggles of running a business while managing employee benefits, and we're here to tell you that recent changes under SECURE 2.0 have made retirement plans more accessible, affordable, and beneficial for both employers and employees. Let's rethink our assumptions about 401(k)s in today’s market.

Here are some key points to consider:

  • Fewer than one in four small businesses currently offer a 401(k), but the number is on the rise.
  • Businesses with up to 100 employees may qualify for up to $5,000 per year in tax credits for plan startup costs for the first three years. Employees must have earned at least $5,000 in the prior year to qualify.
  • An additional credit of up to $1,000 per employee is available for employer contributions.
  • Auto-enrollment is now standard for most new 401(k) plans, boosting participation rates.
  • A well-designed plan can help attract and retain top talent while lowering taxable income, as both plan expenses and employer contributions are tax-deductible.
  • More flexible and affordable options than ever make now an ideal time to consider offering a retirement plan.

Offering a 401(k) is no longer a heavy administrative or financial burden for small businesses. Explore your options to stay competitive in attracting talent. We encourage you to speak with a financial or benefits advisor to create a plan tailored to your needs.

 Should Retirement Funds Go Toward Current Needs?

With current economic challenges such as record inflation and a looming recession, many people are experiencing financial stress. The average credit card debt per household was $9,000 in early 2022, and the temptation to dip into retirement savings to manage financial situations is high. While using retirement funds may offer temporary relief, it is vital to understand the risks and explore alternatives.

Consider the Alternatives

Balance Transfers:  Moving debt to a lower-interest account can significantly reduce your interest payments. Look for balance transfer offers with low or 0% introductory rates to ease your financial burden.

Budget Cuts:  Assessing your spending and identifying areas to cut back can free up funds. Common areas include dining out, subscription services, and entertainment.

Debt Consolidation:  Consolidating multiple debts into a single loan may result in lower interest rates. This approach simplifies payments and can reduce the overall interest paid.

Hardship Loans:  Some financial institutions offer hardship loans at lower interest rates for those facing temporary financial difficulties. These loans might be a better option than withdrawing from retirement accounts.

Understand the Tax Penalties

Withdrawing retirement funds early often leads to paying income taxes and a 10% penalty, particularly with 401(k) accounts. Other retirement savings, such as IRAs and Roth IRAs, also incur similar fees. The immediate financial relief may not outweigh the long-term costs.

Long-Term Impact

Using retirement funds too early can have severe long-term consequences. You lose the opportunity for tax breaks and interest accrual, which can significantly support your retirement in the future. The compound growth of retirement savings is essential for building a secure financial foundation for your later years.

While tapping into retirement funds might seem like a quick fix for current financial woes, the long-term consequences can be damaging. Always explore alternative solutions and consult a financial advisor before making any decisions. Protecting your future financial security should be a priority.

If considering dipping into your retirement savings, seek professional financial guidance to understand all your options. Taking steps to protect your future financial security is crucial.