The purpose of this video is to explain what a 401k is. A 401k is a defined contribution retirement plan that allows a business owner to define their matching for their employees to save for retirement. The 401k can be started small and grow with you over time, as they are great for saving taxes, attracting talent, and building your net worth to make work optional someday.

There are some great tax advantages to leveraging the 401k as you can choose to put your own money in either pre-tax saving taxes now, or Roth saving taxes later. Your money can grow tax deferred, meaning you won't be paying taxes year to year while your money is invested. Inside the 401k, the deferral limits are much higher. Usually about 30 to 40% more can be deferred into a 401k rather than a simple IRA. In addition to the deferral, there are different levels of match allowed that come strictly from the employer.

The options to structure employer contributions are matched based on the employee deferral where employees contribute their own money. You match their contributions according to a specific formula, and this encourages employees to save their own money. Another option, fixed non-elective employer contribution is where your contribution is independent of employee deferrals. You provide a set percentage of their compensation. This ensures all eligible employees receive a contribution.

The greatest benefit for a 401k is that as an owner employer, you have the optional opportunity to add more money into the 401k after the year ends. This year end contribution is called profit sharing, which has nothing to do with the net profit of your business. It simply means that you can put more money into the 401k should you have leftover cash flow and wish to get a tax deduction. Profit sharing amounts are limited by age, but is always optional, and you can budget any amount of profit sharing up to the maximum allowed by the IRS or choose to forego it. If you have other priorities for your cash, one nice benefit is that you can layer on a pension plan to help put away hundreds of thousands of dollars for retirement.