So you have recently started your own business, and you are trying to figure out the legal structure in which it will operate. There are several types to choose from, such as a sole proprietorship, Limited Liability Company (LLC), corporation, and general partnership.
LLC is one of the most common, and we will be discussing that in this article.
What is a 401k Plan?
A 401k plan is a retirement savings plan that is under the category of a defined-contribution retirement plan. The IRS determines the retirement plan, and the employer’s contribution is predefined.
For self-employed members of small businesses that run as a Limited Liability Company (LLC), IRS allows them to set up a 401k plan. However, not all members of an LLC are eligible to do so. There are some restrictions.
Setting up a 401k plan requires such designated members to be actively engaged in the activities (operations, management, and administration) of the business. So before you choose your investment options for your 401k plan, you have to make sure you are qualified.
IRS doesn’t interpret a passive involvement of members in LLC as self-employment. Services have to be provided to the company. The LLC itself doesn’t pay the state or federal income taxes.
There is a misconception that 401k plans are only for large employers. However, there are 401k plans for small employers as well. One of the best 401k plans for small business is provided by Redrock House Management.
How a 401k Plan Works?
Even though an LLC does not pay federal and state income taxes, the federal tax permits employees to partake in their employer’s 401k plan. They can benefit from the tax deferral on contributions to their retirement account.
When you open a 401k account with one of the best 401k plans for small business, IRS allows you to earn a maximum amount of the annual contributions that are deductible on return.
If you are 50 years of age or older, the law permits increment in the tax-deductible yearly contributions. Also, the funds in the account keep growing, which aren’t taxable until you start withdrawing the funds during retirement.
Withdrawing 401k Funds
When it comes to withdrawing funds from the 401k, the federal government typically imposes a 10 percent tax penalty. This is done when the funds in the account are withdrawn before you attain the age of 59.
However, there are exceptions to this. In the case of financial hardship or disability, the funds can be withdrawn. You could also get-away with withdrawing the funds if you set up a 401k in a different retirement account.
Note that when it comes to withdrawing 401k funds, only the tax penalty won’t be applicable if you satisfy the criteria for exemption. You would still have to pay the general income tax upon withdrawal.