Employers: Find Out How You Can Contribute Tax Free Savings to Employees

BusinessManagement

  • Author Kristie Lorette
  • Published April 27, 2010
  • Word count 471

With all of the various tax laws in place, untaxed savings accounts might seem too complicated to use. There are, however, several savings account options that can serve a two-fold purpose: providing tax free income that can grow uninhibited over the course of decades and providing a retirement program or health savings program that employers can add to and thus ensure that employees have a financial cushion for the future. Setting up the best tax free savings option is largely a matter of considering the employee’s situation and then counseling the employee about the savings plan that will be most beneficial.

401(k)

The 401(k) is probably the most common and most popular type of tax-free savings account that an employer can use for contributing to an employee. The 401(k) allows an employer to match an employee’s own contribution. Additionally, a 401(k) provides the opportunity for an employer to arrange for a variety of investment possibilities, including mutual funds and bonds. With this type of account, the income added to the account is untaxed in the year that it is contributed. What is more, the money in the account remains untaxed until it is removed from the account, unless the account holder leaves the money intact until he or she is almost sixty years old. Recent changes in income tax laws have also provided for the Roth 401(k), to which 401(k) holders can move funds without risk of taxation. Because of the changes, Roth 401(k) holders can also remove the money from the account with risk of taxation.

Employer Retirement Savings Account

The Employer Retirement Savings Account (ERSA) was created under the similar rules of the 401(k) but with the goal of simplifying the process in order to motivate employer contribution and encourage savings among the many Americans who do not currently have a retirement plan. In particular, the ERSA creates the opportunity for smaller businesses – which previously were unable to set up basic 401(k) plans for employees due to various regulations – to establish Employer Retirement Savings Accounts and thus give employees the chance to save money for retirement. Like the 401(k), the ERSA also creates tax-free income growth.

Health Savings Account

Created for those who are part of a High Deductible Health Plan, a Health Savings Account (HSA) allows employees to save for their health spending without taxation on the money that is saved. The rules for a Health Savings Account are fairly strict, in that the account must be created within the boundaries of an HSA trustee – which may be a bank or even an IRS-approved employer. Money contributed to an HSA is not taxed when it is deposited; and unlike in the Flexible Spending Account (also designed for health savings), the money is an HSA can be retained in the account from one year to the next.

Kristie Lorette is a freelance writer and marketing consultant that specializes in personal finance. She is also the editor of The Mortgage & Credit Diva, a blog devoted to mortgage and personal finance tips, tricks, and advice for consumers. You can read Kristie’s blog at www.mortgageandcreditdiva.blogspot.com or learn more about her writing and marketing services at www.studiokwriting.com.

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