New Laws Allowing Addition of Roth 401K

I did not have a Roth option added to my small business 401K when it was set up a couple of years ago. Can I add it now? Does adding this option give my employees any extra benefit?- Noreen Kugel is a seamstress from New Orleans, Louisiana.

Noreen, your question comes at a really great time!  You can definitely add a Roth option to your existing 401K plan and your employees will love it. Here is why:

The Small Business Jobs and Credit Act signed by President Obama in September 2010 lets employees who are already participating in a 401K plan to convert this plan to a Roth. Although the employee will have to recognize the income that is converted in this way (for tax purposes), it is still worthwhile considering that Roth funds grow tax free. Earlier, the only way your employee could have moved his traditional 401K funds to a Roth plan was to quit his job or retire and then move to a Roth IRA. With this new law, conversions have become easy and painless.

As employer, what you need to know is that you do incur some administrative costs and add a bit more to your accounting burden. But your employees will really appreciate the flexibility that the Roth addition gives them. You will find that the increased employee loyalty pays you back many times over. Use a DIY software package like to keep your plan management simple and cost effective so that the advantages you stand to gain from the Roth addition far outnumber the disadvantages.

Advantages of Establishing Qualified Plans

Why Should I Choose a Qualified Plan for my Business? What’s in it for me? – Guy Linscott, owner of a packaged foods store in Adrian, Georgia

Choosing the right retirement plan is not just important for your employees but also for your business. After all, the plan needs to match the needs of your business and keep within its limitations. At the same time, it should also offer some attractive benefits to employees so that they will voluntarily participate in it. Voluntary participation makes it far easier to manage the employee benefit plan.

A qualified plan like the 401K brings some special advantages to employees, but employers stand to gain by establishing such plans too. The most attractive benefit you get from establishing a qualified plan for your employees is the tax benefit. When you make contributions to the employee’s 401K account, you can claim tax deductions on them. By offering the best possible employer contribution matches, you can attract really skilled employees to your business. These employer contributions also help retain employees and build loyalty to among your staff.

The cost of setting up and managing such plans has considerably reduced in recent times, thanks to cost effective DIY 401 suites like You may be able to claim tax credit for some portion of the set up costs incurred when you establish a qualified plan and cut costs even further. In fact, you can claim such credits over the initial three years of the plan. It may also be possible for you to claim start up cost tax credit in the year before the financial year in which the plan becomes operational.

SIMPLE 401Ks vs Traditional 401Ks

Should I Choose a Traditional 401K Instead of a SIMPLE 401K for my New Business? Jessie Prenatt, Godwin, North Carolina, runs a day care center at home. 

A SIMPLE 401K is a good choice for businesses that are really small. If you employ just a handful of people at your day care then this plan is a good option for you. In fact, businesses that employ less than 100 people can choose this plan. The paper work you will need to carry out for establishing this kind of 401K is much less and also simpler than the traditional 401K requires. As the employer setting up the SIMPLE 401K you will appreciate the lower fee that is usually charged by providers to set up this kind of retirement benefit plan.

As regards contributions, the SIMPLE 401K plan contributions you make on behalf of your employees should equal 3% of the participant employee’s salary. Another fact to know with SIMPLE 401K is that your contributions are immediately vested.

Your employees may not be able to contribute as much to the SIMPLE as they can to the traditional 401K. Considering that both take pre tax contributions, in effect, reducing the taxable salary the employees draw, this is an aspect that both you and your employees should give some thought to before choosing the SIMPLE 401K.

Understand how the 401K works and what its tax and other advantages are by looking at a few informative sites like before you decide on the plan you want for your business.

Offering Roth 401Ks

My employees prefer to have a retirement saving plan that lets them withdraw funds tax free? Can I replace my traditional 401K with a Roth 401K? Home foods company owner Ericka Bryand, Augusta, Maine

The Roth 401K does let your employees withdraw their money without having to pay taxes on them. The contributions go into this plan from taxed dollars which is why this is possible. However, the law does not allow you to set up only a Roth 401K for your small business even if your employees prefer this plan.

As the employer, you have to establish a traditional 401K plan first for your home foods business employees. The Roth 401K can be offered as a part of this traditional 401K plan. It is not possible to have the Roth as a stand alone employee benefit plan for your business. If you have an existing 401K plan, you can add the Roth to it and inform your employees about this addition so that they can take advantage of the tax free withdrawals feature.

Make sure your employees know that while they can participate in a Roth IRA that is self established, they can contribute to a Roth 401K only if you offer one to them. But, if your employees are not likely to be in a higher tax bracket at retirement age, it is better for them to invest in a traditional 401K plan. For comprehensive information on 401Ks and the various options you have with them you can visit sites like Here you will find information about vesting, contributions, and also links to DIY 401K suites that make setting up and managing these plans easy.

Roth 401k vs Traditional 401K

Which one is better for my business- the Roth 401K or the traditional 401K? What tax advantages do participants get with each?- Avis Charlebois, runs a florist shop in Boise, Idaho.

The 401K plan is one that is designed to offer the best possible savings options for a retired life for you and your employees. As different people have different kinds of investment needs, there are also variations of 401K plans for you to adopt. There is one main aspect to keep in mind when you are comparing the advantages of a traditional 401K with those of a Roth 401K plan.

A traditional 401K plan is built up using pre tax dollars. That is, you withhold a pre determined portion of each employee’s pay check before tax and divert this portion to the traditional 401K plan. As tax is not paid on these earnings at this time, they are taxable when the employee withdraws them in the future. The idea is that the employee may have retired and have low income at the time when he needs to withdraw funds from the traditional 401K. So he may fall within a lower tax bracket as well.

Contributions to a Roth 401K are made with taxed dollars when your employee feels that he may be in a higher tax bracket at withdrawal time. As the contributions are already taxed, withdrawals are completely tax free. However, a Roth can be offered only as a part of a traditional plan.

This difference in tax treatment is the main factor to keep in mind when comparing Roths with Traditional 401Ks. For more information on 401K basics you can look up sites like before you make your final decision.

How to Adopt a Written Plan for 401K

Do I have to hire a professional to draw up a written plan document for my proposed 401K? Or can I simply do it myself? Darren Rapozo, Dunwoody, Georgia, runs a photo studio.

Your 401K needs a written plan document that is IRS approved. If you are getting your plan set up by a financial institution like a mutual fund company, bank or insurance firm, then they will probably have the right kind of plan document ready for you. Usually, 401K plan providers have their own prototype plans that are designed in line with the IRS requirements.

If you want to set up your own plan using a DIY package like, then you may want to consult a professional about writing up the plan document before you actually start the set up process. When you decide to write you own plan document, you need not get prior IRS approval. However, if you prefer to do so, you can choose to get approval by paying a fee and asking for a determination letter. In case you have a financial advisor, he can tell you if you should indeed apply for such approval for your plan outline. In some cases, the fee is not applicable. So it is best for you to check with your advisor or look at the IRS website before you send in your fee. Remember that if in future, you employ some others for your business, a copy of the plan document must be given to them as well.

Choosing a Small Business Roth 401K

Are there Roth 401Ks that let me and my employees withdraw money tax free? Can I opt for one for my start up graphics studio?- Benita Millikin, Andover, Kansas

The law allows businesses to set up Roth 401Ks for employees. These plans do give you the advantage of being able to withdraw the funds in the account completely tax free. But what you need to understand is that a Roth does not let you entirely get away from paying tax on the contributions. What happens with Roth 401Ks is that the contribution is taken out of your post tax dollars. That is, unlike a traditional 401K where deductions are made before tax calculation, a Roth 401k contribution is made after tax is paid on your paycheck. Because the contribution to this account is made from taxed funds, you avoid paying tax a second time at withdrawal time.

If your employees believe that they will fall in the same or higher tax bracket in their retired years, then a Roth 401K is the best employee benefit plan you can offer to them. Given that these plans have substantially bigger contribution limits as compared with IRAs makes them even more attractive to employees.

If you have doubts about the degree of difficulty you will face in managing a Roth 401K, you can tie up with a comprehensive software suite like that offers these plans in addition to traditional ones. Using a DIY software like this helps you track contributions, assess account balances, manage investments and keep record of withdrawals easily and accurately.

Information that Helps You Choose the Right Employee Benefit Plan

What kind of information should I give my investment advisor when discussing setting up a retirement plan for my small business? I think a 401K plan is the best option. Do I still need to talk to my advisor?– Marylou Saver, Atlantic Beach, Florida runs a party decorating service.

Choosing the employee benefit plan or retirement plan that you should set up for your business can be a tedious, time consuming and, above all, very confusing task. Even if you do hire an investment advisor to help you with this task, there is still some analyzing and comparing for you to do. The advisor may ask for some details about your business that will help determine the kind of plan that will suit your needs perfectly. Remember that even if you have decided on a 401K plan, your advisor may be able to help decide exactly which kind (Solo 401K,SafeHarbor401K, Roth 401K etc) will suit you. Here is some of the information you should have at hand before you sit down to discussing the kind of retirement benefit plan your business should offer employees.

The first point to consider is your contribution. How much can your business afford to contribute to the employee 401Ks? What kind can you afford- a regular monthly contribution or a non specified profit sharing contribution? Given that the total contribution outlay for the business will depend on the number of employees and their eligibility to the plan, these employee details will also be needed by the advisor.

Unless you are discussing the plan with the third party agency that will set up the 401K for you, it is also worthwhile discussing DIY software suites like These suites let you manage your 401K on your own with ease. This helps keeps the costs down while giving you and your employees a great deal of control over the plan assets.

Comparing 401Ks with Other Small Business Employee Benefit Plans

I know that there are many employee benefit plans that I can choose to set up for my business. Why am I always recommended a 401K over the others?- Jason Bartholomew, Delaware, owns a café.

There are different options available to employers like you who are looking to make retired life easier for their employees by setting up an employee benefit plan for them. Although there are other plans, the SEP IRA and the 401K are the most popular ones. Your financial advisor is right in recommending that you establish a 401K plan instead of a SEP IRA because there are some special advantages this plan has to offer.

The first and most important one is that the 401K plan is a great way to encourage employees to save for their own future. Employee contributions are deducted directly from their paycheck even before they are paid. You can choose to match their contributions to boost employee morale and loyalty. In effect, your 401K plan puts the employee’s retirement planning firmly in his hands with help from you in the form of contribution matches. When you use an easy to operate software suite like to manage the 401K, the employee can stay updated with his retirement planning account at all times. With a SEP IRA, only you, the employer, make the contributions. When your employee quits working for you, he/ she can simply walk away with the money in the IRA account.

Another important advantage of 401Ks is that you can opt for a vesting schedule so that only employees who have been with your company for a while can withdraw your contributions. This ensures that you are rewarding only those employees who have really contributed to your business.

Importance of Investment Choices with 401K Plans

Why should I look for DIY 401K suites that offer a number of investment options? Aren’t these too expensive for a small business like mine? Glenn Johnson, runs a home foods business in Kentucky.

The primary objective of offering a 401K plan to your employees is to encourage them to start saving for their future. Any business, however small, is bound to have employees of various ages, in different stages of life. Older employees, who are near retirement, will typically prefer to invest their 401K contributions in risk free, safe avenues. Younger ones will be more open to higher risk investments. Although the 401K is a nest egg for retired years, the degree of risk that participants will be willing to undertake with respect to deploying the funds in this account may differ substantially.

Choosing a DIY 401K package that offers very limited investment choices is a sure fire way to make your employees quickly lose interest in contributing to it because it simply doesn’t; match their investment attitudes. Opt for suites like that offer top notch investment avenues from Vanguard, Fidelity and many others to encourage your employees to maintain contributions voluntarily. Because of the comprehensive range of investment choices offered by such 401K suites, each and very employee of yours is sure to find a product that matches his risk appetite, investment horizon and returns expectation.

Many of these effective and flexible DIY 401K software suites let you keep costs well within your budget. The fact that you can administer it yourself with minimum time investment lets you eliminate administration fees that you would otherwise be paying to a third party.