Penalties on IRAs, MSAs, and 401(k)s
The 401(k) is a retirement plan implemented and provided to
employees by their employer as a means to save for their
retirement. Not only do many employers contribute to the
employees 401(k) along with employee contributions (this is
known as matching), but the contributions are pre-tax
contributions; in other words the deduction is taken prior to
calculating the state and federal taxes due on the wages. This
helps not only the employee, but also the employer.
There are several variations of the 401(k) and depending upon
your employer's status as a small business, and their ability to
fund a 401(k), you may operate under a SIMPLE 401(k), a
traditional 401(k), or The Safe Harbor 401(k). All the plans
vary as to their contribution limits, the employers required
matching contributions, and the level of administration and IRS
reporting that must be factored into the plan upkeep. Let's take
a look at each of the plans, and discuss some of the advantages
and disadvantages of each.
The compliance testing that must be done with the traditional
401(k) are quite complex, and require much involvement by the
accounting or payroll department of the business. Today, many
small businesses outsource their payroll function, and include
the 401(k) plan administration as one of the outsourced
functions also. The greatest advantage to the small business is
that the business is not required to contribute to the plan,
unless there is a significant imbalance in the contributions of
the highly compensated employees versus the lesser paid
employees. The Safe Harbor 401(k) is a spin-off of the
traditional plan, except for the fact that there aren't all the
compliance requirements and testing that must be completed each
year. The Safe Harbor plan is best suited for the small business
that has a steady revenue stream, and that is able to make a
required contribution each year to the employee fund. The
employer must make a 3% contribution to all employees who
qualify for retirement funding, regardless of whether the
employee makes a contribution; also, the employer contribution
level for non-highly compensated employees must not differ more
than 2% from the highly compensated employee contribution rate.
In this manner, the employer is required to provide the same
benefits for all employees, without all the compliance testing
of the traditional plan. The Safe Harbor 401(k) is simple to set
up, and can be accomplished within 30 days of the new year, and
is simple to administer. The disadvantage to this plan is the
required contribution rates, and if the business does not have a
steady cash or revenue flow, it is not a recommended plan.
After examining the different plan options available for small
to medium companies, there should be at least one that fits
within any small businesses scope of operations. Providing
retirement funding for small business family members, as well as
all other employees is one of the greatest benefits a company
can offer current and prospective employees.
The IRA, individual retirement account, and an MSA, or medical
savings account, works along the same premise, only the
contributions are made in lump sum amounts, generally, at the
end or just prior to the end of the tax year. For some, the IRA
contribution made be made as late as April 15 of the upcoming
tax year and deducted in the previous year. The individual
contributions are made not through a company plan, but simply by
the individual as an alternative means of acquiring savings to
be used for retirement.
The taxes on the investment growth, and any dividends
accumulated are deferred until the money is withdrawn, and it is
then taxed as additional ordinary income when received. If for
some reason you should need to withdraw the money prior to
attainment of age 59