Best Retirement Accounts for Your Employees

Your employees know that they need more than just social security to live on once they retire. That's why retirement plans are some of the best benefits you can offer as a business owner. But not only are you giving your employees something they can build a more secure future with, but you also increase your chances of keeping great talent in your company.

So give them something to grow old with; give them a great retirement account.

Defined Contribution Plans

Defined contribution (DC) plans have virtually taken control of the retirement marketplace since the 1980s. Rather than choose defined benefit plans, a significant 84% of Fortune 500 companies generally offer DCs.

DCs have a contribution limit, but once the account holder hits 50 years old, they can contribute more every year. Many DC programs also feature a Roth option. With the Roth option, employees contribute to the plan using post-tax dollars. Once they retire, they can access the money tax-free.

The one downside to DC plans is that there is virtually no financial advisement involved. The person who holds the DC account is in charge of their contributions and investments. A perfect example of this is the 401(k) plan. No one is managing your account, forcing you to contribute 5% every year. Most employees will often contribute 1% to receive a bigger paycheck every week.

Because of this, employees tend to not put away as much money as they should. It is in your best interest as a boss to arrange an informational meeting with a professional and your employees to discuss the importance of their retirement plan and investments.

Despite this, controlling the amount of money an employee can save for retirement makes DCs an ideal retirement plan choice.

1. The 401(k) Plan

The 401(k) plan is a tax-advantaged plan. Employees contribute to their 401(k) using pre-tax wages. This means whatever they contribute is not considered taxable income.

The plan facilitates tax-free growth of these contributions until the account holder withdraws funds upon retirement. At that point, the distributions are usually considered a taxable gain. Employees who withdraw from their 401(k) before they reach 59 1/2 may incur penalties and taxes.

A 401(k) plan is a fantastic way for the employees to save for retirement. It's a huge selling point for a job. Contributions to the plan can come straight out of an employee's paycheck, and the company itself can make matching contributions to their employee's plans as well. Employees can also invest in high-return investments, including stocks. Until they withdraw the funds, they don't have to pay any taxes.

One major downside of the 401(k) plan is that the contributor may suffer a penalty for withdrawing the money, even in an emergency. Also, investments are limited to employer-provided funds. This means employees cannot invest in a program of their choice.

Overall, you can't go wrong with a 401(k). It encourages employees to contribute to their retirement. And since an employer can match contributions, it's like an employee is getting free money.

2. The 403(b) Plan

A 403(b) plan resembles the 401(k) plan, but it's usually offered by charities, public schools, and churches. 403(b) plans are also exempt from nondiscrimination testing. This yearly test prevents high-level staff members from receiving an unfair amount of benefits. Why is the 403(b) exempt? It's technically not an employer-sponsored plan because the employer is not making contributions to it. As long as your business follows this rule, you are exempt from certain ERISA guidelines.

Like a 401(k), employees contribute pre-tax money, which is not considered taxable income by the IRS. It can, therefore, grow tax-free. When the account holder withdraws funds, however, it becomes a taxable gain. Also, any withdrawals before the employee reaches 59 1/2 years old will attract penalties and extra taxes.

A 403(b) plan's disadvantage is that the contributor may find it challenging to access the funds unless he's dealing with a qualified emergency. Otherwise, the employee can lose a significant part of his savings needlessly.

3. IRAs

IRAs are referred to as the "big kahunas" of retirement savings plans. A contributor can quickly set up an IRA at a bank, a brokerage, or other financial institution. Once they do this, they can hold investments like stocks, bonds, cash, and mutual funds. These are usually earmarked for retirement.

Keep in mind that an IRA, as great as it is, usually limits how an employee can contribute each year. There is also, in some cases, an income requirement to open an IRA. You cannot make over a certain amount each year. The institution also determines how the funds are taxed or cushioned from taxation in a deposit or withdrawal.

IRAs effectively thrust the contributor into the drivers' seat, allowing them to choose a bank or brokerage, and make all investment decisions. They can also hire someone to manage their investments and IRA account. An account holder can also decide how and when to get a tax break. However, this depends on the employee's eligibility status and type of IRA (Roth or Traditional).

Even so, an IRA's main disadvantage is that it has lower annual contribution limits compared to other workplace retirement accounts.

Conclusion

Employers and employees alike generally view a 401(k) as the best retirement option. But do not snub your nose at the almighty IRA account. Whatever you choose, you are allowing your employees to take control of their retirement. Ensure you have the resources to educate them on the benefits of their retirement plan, whatever you choose.