Why You Need a 401(k)

Why You Need a 401(k)

Sole proprietors, employees of small businesses, and independent contractors may relish the freedom their careers offer, but the other side of freedom is that these entrepreneurs may face greater challenges with retirement planning. Traditional employers at larger firms sponsor 401(k) retirement savings plans, but a Long Island accountant firm can help you participate in one of the best long-range savings plans available. Whether you are a small business owner who wants to give your employees new options or a successful independent worker looking for ways to save, let your CPA help you find the right retirement package for you.

Pre-Tax Investments

Even for workers who have other retirement options, a 401(k) plan offers a significant benefit when it comes to income tax payments. The amount you contribute to a 401(k) plan is removed from your income before taxes, so you are responsible for taxes on a smaller net income. Self-employment tax obligations are often an independent worker’s greatest financial challenge. By working with your financial advisor and investing part of your income in a 401(k) fund, you make sound future plans while easing current financial responsibilities through tax-deferred contributions. Your accountant can help you determine the impact your savings plan will have on your income with a 401(k) calculator.

Investing Options

Joining a 401(k) plan gives you a wide range of investment options. Stock or bond mutual funds, money-market accounts, and stable-value funds give you an array of choices to fit your investment portfolio. Your CPA service provider will help you choose the right plan for you. Typically, plan participants opt for higher risk and higher yield for long-range financial planning and select more conservative strategies that pay off closer to retirement.

With a financial planner, you aren’t bound to a single strategy and can adapt your plan to meet changing needs. Stock index funds plug you into the larger market and have an excellent risk-to-reward ratio for long-term planning. Target-date retirement funds include a combination of stocks and bonds designed to offer a maximum return on investments at a set time; these plans are a good choice for those who want to combine more aggressive investments early in the plan and move toward more conservative investments as the retirement date approaches.

Tax Deferment Helps Your Retirement Plan Grow

Interest and investments earn capital, but if that wealth is no longer under your control, you are not the one benefiting. With a tax-deferred investment plan such as a 401(k), you keep more of your income and can therefore achieve more with it. Because you and your accountant have control over that money until retirement and can freely shift it within your chosen plan, you and your CPA take full advantage of investment opportunities as they come. Your financial advisor knows what you want your money to do for you, so keep more of it by investing it now and deferring taxes.

For Employers

Larger businesses have offered employer-matching contributions for retirement plans as a perk for some time, but that hasn’t always been an option for smaller firms and partnerships. With your CPA, you can now find a business 401(k) plan that allows you to become more competitive by offering this benefit to your personnel. As with personal 401(k) accounts, a business 401(k) helps employers limit tax expenses and gives plan participants greater control over their own finances. With a vesting schedule that encourages the firm’s best and brightest to remain and help the business grow, a 401(k) becomes a smart business solution that makes firms competitive with their larger counterparts.

To get the most from your 401(k) as an employee, an employer, or an independent contractor, choose a local Long Island CPA firm that understands the full range of retirement possibilities.

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