• Joshua Crowe, CONTRIBUTOR
  • Hi, I am Josh Crowe the owner and founder of Sunpath Financial, a retirement specialist firm in Newport Beach. I hope you find our website and services useful!
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August 29, 2018 views: 30,239

Are you looking for an affordable way to attract and retain great talent while reducing your tax obligation, a 401k might be the solution.

What is a 401(k):

A 401(k) allows employers and employees the opportunity to defer a portion of their income through payroll deductions to reduce their tax liability in the short-term, while saving for retirement in the long-term.

Matching Contributions

It’s attractive incentive to current and prospective employees for its match option, a contribution on behalf of the employee by the employer, usually as a percentage of annual salary, or up to a certain dollar amount.

Employer’s who choose to match as a percentage of salary, typically structure contributions as a partial match to reduce their total out-of-pocket expense, while those with highly compensated employees, will choose to contribute up to a certain dollar amount, to limit their total out-of-pocket expense.

Matching Examples

Consider you offer your employees a 100% match on all their contributions for the year up to a maximum of 3%. For an employee earning $50,000 per year, the maximum you would contribute is $1,500.

You could structure a partial match plan by offering employees 50% of their total annual contribution up to 6%. The same employee would have to contribute $3,000 to receive your $1,500 match, however, the 6% match might sound more attractive than the 3% match from your competitor.

If you have highly compensated employees, you might offer a match up to a certain dollar amount to reduce your total out-of-pocket contribution. For an employee earning $250,000 per year, consider a matched dollar amount of $5,000 in lieu of a 100% match up to 3% ($7,500), saving $2,500 per year.

Annual Contribution Limitations

Regardless of whether contributions come from you or your employees, all deferrals are subject to the annual contribution limits per the Internal Revenue Service (IRS).

For 2018, the total annual contributions to all 401(k) accounts held by the same employee is the lesser of $55,000, or 100% of the employee’s annual compensation.

The maximum employee contribution is $18,500. Individuals over 50 can contribute an additional $6,000 per the IRS catch-up rule.

Reducing Your Tax Liability

Contributions falling within the annual limits are tax deducible. This includes your contributions to your personal plan, and all employee matched contributions you made. Your employees will only be able to deduct their personal deferrals.

Tax deferral is the true benefit of this account; because taxes will be paid now or in the future, the benefit of earning interest on the money you would have paid the IRS is the key to generating larger returns.

Vesting

Vesting is a percentage based schedule of ownership that happens over time, and is utilized to deter early exits. The percentage of ownership typically increases with the employee’s tenure. The average number of years to be vested is 5, and the most common schedule is 0% end of year one, 20% end of year two, 40% end of year three, 60% end of year four,  and 100% end of year 5.

Managing your 401(k)

From the online management tool you can view the plan’s balance, the funds you and your employees are invested in, the performance of those funds over a predefined time frame, the categories of funds selected, any personal of employee loans.

You also have the ability to manage and process termination distributions, distribution approvals (e.g. rollovers), and view all other transactions. Your employees will have access to a similar portal where they can review their balance, make changes to funds, view performance of their funds, request loans, and access a handful of helpful retirement calculators and literature.

How we invest your money

Although the plan is self-directed, we hand select the options you and your employees choose from. The funds we select are known as exchange traded funds (ETFs), which are similar to mutual funds, both are funds-of-funds.

When you buy these funds, you’re actually purchasing a single stock of a company that has bundled a series stocks or/and bonds, offering, inherently granting diversification. Although these funds are diversified, it’s usually on a sector or industry basis.

That is why we work with a series of ETFs across all sectors, industry groups, industries, and sub-industries. For how who do not with to self-administer their funds, we offer the service gratis to all plan participants at the convince of their home/work, our office, or via the phone.

E*Trade as a Custodian

Funds are housed with our custodian, E*Trade. With 2.366 billion in annual revenue, and $63.37 billion in assets, and 3,600 employees, E*Trade is a financial conglomerate. They are FDIC insured, and one of the top rated online financial services companies in the world.

Get a Quote

There are several components to acquiring a quote for a 401(k) as no two companies are the same. If you would like a quote, please complete the following form or call us at 949-438-3433.

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