Five Reasons Why a 401(k) is Better Than an IRA

Though any type of retirement savings is better than NO retirement savings, utilizing a 401(k) Plan is better for you and your employees! Here are FIVE reasons why.

1. TAX-FREE CONTRIBUTIONS – We all want to lower taxes and 401(k)s allow us to do just that! Every dollar contributed on a pre-tax basis to a 401(k) through payroll deductions is like saving 25% of each of those dollars. Put into prospective, if you normally stash $5,000 away in an IRA, putting those dollars in a pre-tax 401(k) will save you $1,250 in taxes! Oh, and the MidwestHR 401(k) plan also offers a ROTH (post tax) contribution option.
2. GENEROUS ANNUAL CONTRIBUTIONS LIMITS – IRA’s limit the savings power for employees to just $5,500 per year for workers under 50 and $6,500 for those 50 and older.  401k plans offer limits over three times those amounts at $18,500 for those under 50 and $24,500 for those over. Larger contributions, especially on a pre-tax basis, allow bigger tax savings, as well.
3. TAX-DEFERRED INVESTMENT GROWTH – Those who invest in a traditional brokerage account are required to report and pay taxes each year on the gains they obtain. What is great about a 401(k) plan is that your gains are tax-deferred, allowing you to reinvest your earnings and grow your retirement savings even more. Then, at time of retirement, you pay taxes (hopefully, at a lower tax bracket) on your distribution, contributions and gains.
4. ACCESS TO ACCOUNT– Unlike traditional IRA’s that require contributions to remain untouched until age 59 1/2, a 401(k) plan allows access to account assets for several reasons:
   1. General Loan – Borrow up to 50% of the account balance for a term up to five (5) years. Interest rates are usually Prime+1 for most plans and the neat thing about that is that the participants pays the interest back to themselves and NOT to a bank or other lending institution. Also, the loan payment comes directly from the participant’s paycheck so there is no fear of missed payments or related fees.
   2. Residential Loan – Borrow up to 50% of the account balance for a term up to 30 years. As with general loans, the interest rate is usually Prime+1 and is paid to the participant and not a bank. Also, installments are paid via payroll deduction and mortgage institutions don’t scrutinize these funds as they do “gifts” during the loan process.
   3. Hardship Withdrawals – Under certain circumstances, participants can withdraw money from their account to satisfy emergency needs such as funeral expenses, medical bills, college tuition, home repairs and to prevent the loss of their home to foreclosure/eviction.
   4. In Service Withdrawals – If allowed, those 59 1/2 and older who are still working are able to take distributions from a 401(k) without penalty.
5. NO EMPLOYER COST, LIABILITY OR HASSLE (with MidwestHR) – This fifth reason is a critical deciding factor for many companies looking to utilize a Professional Employer Organization (PEO). Clients of MidwestHR have access to a multiple employer 401(k) plan as part of our service offering. The uniqueness of the MidwestHR plan over other PEOs is there are no associated costs for clients to adopt into the plan. Also, MidwestHR is the Fiduciary on the plan and liable for all administration, compliance, testing, audits and filings. Plus, parameters such as eligibility and employer match are set at the client level, so even if there is no company match, you can still offer a 401(k) savings option to your employees.

Saving for our retirement years should be top of mind for most of us in the workforce. As an employer, it’s up to you to provide the best avenue for savings for your employees. Though any type of savings is better than no savings at all, offering a 401k plan to your employees allows them best solution to save and grow their retirement investments.

From payroll and tax administration to comprehensive benefits packages (including a 401k Plan), MidwestHR provides complete HR services. A leading Certified Professional Employer Organization (CPEO) in Illinois, we understand every business has different needs. That’s why we offer a la carte services without a long-term contract, so employers can choose to outsource part or all of their HR functions. Our top priority is becoming a trusted partner so you can focus on growing your business. Give us a call 630-836-3000 to learn more about how we can help.