Unlocking Retirement Plan Options: State IRA vs. 401(k)

Derrick Alexander |
Categories
401K fees
state mandated plans

 

Written by: Derrick Alexander, Managing Partner and Lead Advisor

When it comes to retirement savings, understanding the differences between state-mandated IRA plans and 401(k) plans can significantly impact your financial future. Let's break down the key points and highlight the benefits of tax credits associated with 401(k) plans.

State-Mandated IRA Plans:

  • State-mandated retirement plans typically operate as IRAs, offering a simple solution for employees. Here's what you need to know:
  • Contribution Limit: Limited to $6,500 per year.
  • Employer Contributions: Not allowed, meaning no matching contributions.
  • Investment Options: Typically limited.
  • Administrative Responsibilities: Often fall upon the plan sponsor.

401(k) Plans:

  • In contrast, 401(k) plans offer greater flexibility and potential for higher contributions. Here's a comparison:
  • Contribution Limit: Employees can contribute up to $22,500 per year.
  • Employer Contributions: Employers can offer matching contributions and profit sharing, providing additional incentives for employees.
  • Investment Options: Broader range of investment options available.
  • Administrative Responsibilities: Plan sponsors may still have responsibilities, but administrative tasks can be outsourced.

Tax Credits:

  • One of the key advantages of 401(k) plans is the potential for tax credits, especially with the implementation of Secure Act 2.0. Here's how it works:
  • Tax Credits Calculation: Employers offering 401(k) plans can qualify for significant tax credits, especially if they offer matching contributions or profit sharing.

- Example Scenario: With six employees and offering a match or profit sharing, employers could receive up to $22,000 in tax credits over five years. The potential for tax credits increases substantially for larger businesses with more employees.

Seizing Opportunities:

The availability of tax credits presents a significant opportunity for businesses to enhance their retirement plans and save on costs. By leveraging the benefits of 401(k) plans and maximizing tax credits, businesses can strengthen their retirement offerings while also benefiting from potential tax savings.

In conclusion, while state-mandated IRA plans offer simplicity, 401(k) plans provide greater flexibility, investment options, and the potential for tax credits. Understanding these differences can help businesses make informed decisions when setting up retirement plans for their employees. It's time to unlock the full potential of your retirement savings strategy.