What is a 401(k)?

A 401(k) is an employer-sponsored retirement plan that helps both employees and business owners save for retirement. It offers flexibility, automatic payroll contributions, high contribution limits, and valuable tax benefits, making it one of the most popular ways to save for retirement and achieve financial goals. If you’ve ever wondered why it’s called a 401(k), the name originates from Section 401, Paragraph K of the U.S. Internal Revenue Service Code that defines “Cash or Deferred Arrangements.”

How Does a 401(k) Work?

A 401(k) works by allowing both employers and employees to contribute funds toward retirement savings. As a business owner, you can choose to match employee contributions or provide additional funds, such as profit-sharing contributions. Thanks to SECURE Act 2.0, depending on your plan’s specific configurations, these employer matching and profit-sharing contributions can now be allocated to a Roth 401(k) account, offering employees the potential for tax-free withdrawals in retirement.

Employees contribute directly from their paychecks, choosing investments from a retirement appropriate fund roster. Contributions are typically tax-deferred, with taxes paid upon withdrawal. However, many plans now also offer a Roth 401(k), allowing employees to make after-tax contributions, for tax-free withdrawals in retirement^*.

Why is a 401(k) a Good Solution for My Business?

High Contribution Limits Can Help You Save More

401(k)s offer significantly higher contribution limits than most if not all other retirement solutions in the United States, such as IRAs, allowing you to save more each year.

Tax Benefits for You and Your Business

401(k)s offer tax breaks including tax credits and deductions for your business. Most company costs associated with operating a 401(k) plan can be deducted at tax time – including any contributions you or your company makes to the plan. If your business has employees, you could qualify for tax credits that can offset the cost of opening a new 401(k).

Flexible Plan Designs to Meet Your Business Needs

As the plan sponsor and/or trustee, you select the rules for who is eligible to participate, whether your company will match contributions, how long before employees become vested, and more.

Portability to Manage Your Retirement Savings

You can roll your 401(k) over if you decide to start another company, retire, or convert to an IRA if/when you leave the business.

Attract and Retain Top Talent

Strong benefits can help retain your team. Research indicates that 78% of employees would look for a new employer if they felt their benefit package was inadequate¹. Whether you're recruiting or seeking to keep your current employees, a 401(k) is a terrific incentive.

^* Assets withdrawn before 59½ may incur a 10% tax penalty.

¹ 2024 Intuit QuickBooks All State Health Solutions Benefits Survey

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.