Roth 401k for Small Business

I have recently opened my own pet boutique. Although I haven’t started drawing in many customers yet, I am sure that in the coming years I will be making a comfortable living from this business. Should I choose to set up a Roth 401k for my business instead of a traditional 401k plan? Elvia B. Allen, South Bend, IN 46625

Elvia, for a business like yours that is in a nascent stage but is sure to grow big in the years to come, a Roth 401k is definitely the better plan. This is because with the Roth you pay taxes now at the time of making contributions to the plan. That is, you contribute after tax dollars. In exchange you avoid paying tax at the time of withdrawing your funds. This is exactly the opposite of what happens with a traditional 401k. With this plan, you contribute pre-tax dollars and pay tax at withdrawal time.

If you believe that your business is likely to be generating more income in future, then you will probably fall in a higher tax bracket then than you do now. By making contributions to a Roth 401k you pay your current lower tax rates. At withdrawal time, you can avoid paying tax at the higher brackets that you may be in then. The net result of participating in a Roth program is that in total, less of your hard earned money will be going to theIRSin the form of taxes.

Look at a few DIY software packages to set up your Roth 401k. Some popular ones that offer several excellent features are listed on You will find that using such packages lets you save significantly on set up and administration costs too.

Roth 401K for Owner Only Businesses

I run a fast growing owner only business in Salisbury, Maryland. Should I set up a traditional 401K or have a Roth option added to it?- Mathew Haskew- Freelance decorator.

The Roth 401K gives you the ability to arrange for tax free income in your retired years. This option is especially beneficial to people like you who run an owner only business. That is because this 401K option lets you stretch your assets and reduce your tax payable.

Revisions to the original law have made it possible for you to make higher annual contributions to this plan. When you compare it with a Roth IRA, the Roth 401K still wins hands down in this area. You can even move from an existing traditional 401K plan where contributions are made from pre- tax dollars to a Roth where you pay in taxed dollars so that future withdrawals are tax free.

The high contribution limits and the fact that the funds grow tax free combine to make this plan very attractive for business owners like you who are likely to grow in terms of earnings in future years. Look at it this way, right now you may fall within a lower tax bracket and you pay little by way of tax before you make contributions to your Roth 401K. Towards the end of your career, your business may have grown multiple times, moving you up the tax ladder to the highest tax bracket possible. Rather than ending up paying tax at those higher rates at withdrawal time, it is best for you to pay tax right now to ensure tax free retired income.

Choose an easy to use package like to set up and manage your 401K so that you can easily and quickly allocate the plan assets in line with your changing needs as your business grows. This way you can also reallocate assets to tax advantaged investments to give you the best savings as your business grows.

The Roth is Not Right for Everyone

I run a small bakery and employ sales people who get paid through sales commissions at Christmas time. I am not sure a Roth is the most beneficial plan for them.- Lorrie Gillyard from Pembroke Pines, Florida.

You are perfectly right, Lorrie. The Roth is generally not a good option for people who earn high incomes on a temporary basis. The earnings of your sales staff will be higher during the Christmas season but much lower during the other months of the year. If they choose a Roth 401K, they have to pay taxes before the contribution is deducted from the paycheck. That is, they contribute with taxed dollars. If their enhanced earnings puts them in a high tax bracket, the whole purpose of saving with a retirement benefit plan is laid waste.

Remember that you can only offer a Roth plan in addition to your regular 401K. If you do add this option, you can simply advise your sales staff to avoid choosing it. The Roth option can still be open to other employees whose income does not fluctuate seasonally. For a detailed comparative analysis of Roths and traditional 401Ks, you can take a look at You will also find a comprehensive software package offered onsite that can make your 401k/ Roth 401k plan administration a breeze.

Choosing a DIY 401K suite like this one also lets your employees get a greater degree of control over their retirement planning funds. This boosts their confidence in the plan and encourages them to participate to the best of their financial capacity.

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.