When you take a look at what other small business owners offer their employees, it becomes clear that small business owners, as a very broad category, aren’t doing enough to help support their employees through retirement. In fact, statistics show that just one-third of small businesses surveyed (companies with less than 20 employees), offer retirement benefits.
Why so few? Well, for starters, it’s definitely a hassle to set up, manage, and pay for when you’re a small business owner with little time and money to invest in what appears to be “extra” and perhaps even “non-essential.” However, we’re here to tell you that that’s just not the case. Investing in your employees is an investment in your business. And, it’s just the right thing to do.
So, today, let’s dive into a few retirement plan options you might have heard about. We’re going to be talking about the differences between a 401(a) vs. 403(b) retirement plan in an effort to help you understand your options.
Already know you want to offer an IRA plan to your employees? We can help you quickly set it all up. We won’t just do that, though. We’ll also manage the plans for you so that your employees can rest assured knowing that their financial future is in the hands of professionals who know what they’re doing. You can learn more about our managed IRA programs here.
What is a 401(a) Plan?
You’ve heard of a 401(k), but what about the first 401? You know, the 401(a)? A 401(a) plan is a 401k-type plan (meaning that it’s pretty similar to the ever popular 401(k) plan) that lets you defer part of your income from federal taxes until retirement. 401(a) plans are typically funded with pre-tax dollars, meaning the money contributed to the 401(a) account reduces your taxable income for the fiscal year. That's great news!
What else do you need to know about a 401(a) plan? You, as the business owner, are the 401(a) plan administrator. This means you get to decide which investments are included in your 401(a) account offer, what fees will be charged to the 401(a) account balances, and whether or not individual employees can take loans from their 401(a) accounts.
In general, 401(a) plans greatly benefit employees as the IRS actually requires employers to contribute to the plans. Regardless of whether or not you make it mandatory to participate in the plan, you still have to contribute to each of your employees’ plans.
Already sold on an IRA plan instead of a 401 plan? You can learn more about our managed IRA programs here.
What Are the 401(a) Contribution Limits?
Now, this is where things start to get interesting (at least for your employees, as they’ll be the ones investing and growing their retirement accounts!).
The contribution limit for a 401(a) plan in 2022 is $61,000. It’s important to note, though, that this limit is the combined limit for contributions made by both you, the employer, and the employee. Also important to note is the fact that you can only contribute up to the total amount of an employee’s salary. So, if an employee only earns $50,000 a year, you both combined can only contribute a maximum of $50,000 that year.
Already sold on an IRA plan instead of a 401 plan? You can learn more about our managed IRA programs here.
What Are the Tax Advantages of a 401(a) Plan?
Contributions made to a 401(a) retirement account are made with pre-tax dollars. This means that you (or your employees, in this case) don’t pay taxes on the amount you contribute until you withdraw the money in retirement (which is usually at the age of 59 ½).
While this isn’t as ideal for earners who are going to be in a much higher tax bracket by the time they retire (because withdrawals are usually taxed at the earner's current tax rate, which is often higher when you’re nearing 60 than it was when you’re 35, for example), the benefit is that the account grows without incurring more taxes.
This means that unlike investing in a brokerage account, for example, the investments employees make in a 401(a) account aren’t subject to capital gains taxes and dividends that need to be taxed each year.
Already sold on an IRA plan instead of a 401 plan? You can learn more about our managed IRA programs here.
What is a 403(b) Plan?
We said we’d walk you through the 401(a) vs. 403(b) decision and we’re getting to that! Now it’s time to define a 403(b) plan. Which is better for you? Really, it comes down to what type of organization you’re registered as.
403(b) plans are for employees of 501(c)(3) organizations and public schools. This means that if you own a small business that is a registered religious institution or a charitable tax-exempt organization, you should opt for a 403(b) plan. Makes things easy, right? Pretty much, yeah.
Another major difference between a 401(a) vs. 403(b) plan is also the types of things that you invest in when you contribute to a 403(b) plan. This namely includes annuity contracts with insurance companies but can also include custodial accounts that invest in mutual funds, too.
Don’t qualify for a 403(b) plan? You can learn more about our managed IRA programs here.
What Are the 403(b) Contribution Limits?
The maximum amount an employee can contribute to a 403(b) retirement plan is $20,500 in 2022. If you're 50 or older, you can contribute an additional $6,500 as a "catch-up" contribution, though, to help increase the amount in your retirement account.
However, on top of the maximum amount an employee can contribute, employers are allowed to contribute an additional $40,500 a year for a total of $61,000 (for workers who are under 50; the total limit for both employee and employer contributions for workers over 50 is $67,500).
Don’t qualify for a 403(b) plan? You can learn more about our managed IRA programs here.
What Are the Tax Advantages of a 403(b) Plan?
They’re actually the same as they are in a 401(a) plan. Both types of retirement accounts are invested with pre-tax dollars. This means that you’ll be taxed when you withdraw the money after you’re eligible at the age of 59 ½.
Don’t qualify for a 403(b) plan? You can learn more about our managed IRA programs here.
Alternatives to 401(a) vs. 403(b) Plans: Wealth Stack Managed IRAs
When it comes to 401(a) vs. 403(b), those are the only retirement options available to small business owners. If you want to offer your employees great retirement solutions while also ensuring that the accounts they’re investing in are going to actually grow long-term and help them build wealth, try the Wealth Stack Growth Pack.
Wealth Stack has plenty of tools at your disposal, including providing access to financial counselors who will walk alongside you and your workers as they educate themselves about all aspects necessary when investing in their retirement portfolios. And, Wealth Stack retirement accounts are managed by an expert investor and former hedge fund manager.
Not only that, but we also:
- Take care of the paperwork and direct deposit setup for you
- Offer access to alternative sources of capital that can help you grow other areas of your business
- Help you learn how to effectively invest in your own business with that capital to see maximum growth
With a library of over 100 videos and articles on everything from investing to retirement planning and personal finance tips, we’re your one-stop-shop for all financial-related questions. You literally won’t find this anywhere else.
Click here to learn more about the Wealth Stack Growth Pack and to schedule your free consultation with a professional today.
