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401(k) vs State Sponsored Retirement Plans for Growing Cannabis Businesses

May 16, 2022

The value of the legal cannabis market is projected to rise from $13.4 billion in 2020 to $33.6 billion globally by 2025 according to Statista. This 250% increase in market value over 5 years signals a need for both a stable workforce and adaptable employee benefits as cannabis businesses continue to support additional employees. A well-designed retirement plan can help cannabis employers cultivate employee retention, with the added benefit of tax reduction opportunities.

On top of financial incentives, there is also growing legal pressure for employers to institute a retirement plan through retirement mandates. Out of the 18 states that have legalized cannabis, 12 of them currently have a retirement plan mandate or are working to implement one.

The 2 Types of State-Administered Programs

Each state that has a retirement mandate also has a state-administered program to substitute for other retirement plan options. Most of the state-administered programs are IRAs - financial accounts that allow the individual to invest while attaining certain tax incentives. In exchange for access to this type of investment account, restrictions are imposed on the circumstances under which an individual can withdraw money.

There are two types of IRAs that state-administered programs use, although Roth IRAs are more common:

Traditional IRAs

Under a traditional IRA, the account owner contributes money that may be written off on a tax return. This money then grows tax-deferred. Once the money is withdrawn, taxes are applied.

Roth IRAs

Under a Roth IRA, however, the money that is invested is taxed before it is placed into the account, and not when it is withdrawn.

Most state-mandated programs operate by automatically signing up each employee for the state-administered program when the employer registers. Employees can opt-out at any time. There is also little-to-no cost associated with start-up as the plan is already established under the state.

Both Traditional and Roth IRAs have the same limits in place for how much can be contributed annually. Additionally, the state-administered programs have limited investment options. There is no guarantee the program will support the investment needs or growth of your company and employees.

401(k) Flexibility

401(k)s are like state-sponsored Traditional IRAs in that they grow tax-deferred, but the similarities end there. Unlike state-administered programs, 401(k)s have many more investment options and additional expense reduction incentives as plan participation grows.

Custom Investment Options

A 401(k) through Leading Retirement Solutions has access to as many as 24,000 investment options, including the ability to invest in nontraditional assets such as real estate or Bitcoin. These nontraditional assets widen the diversification capabilities of portfolio and customization options. 

Opportunities to Match Contributions

401(k)s also come with two additional contribution features: matching contributions and profit-sharing. While some IRAs outside of the state-administered programs offer the ability for company-matching contributions, this is rarely seen in the existing landscape of state-administered programs. Matching contributions allow cannabis employers to match the amount of money employees contribute to their retirement plan each pay period. An employer can match up to a certain amount, although this limit is rarely reached. For example, an employer might match 50% of contributions up to 5% of the employee’s income.

Higher Contribution Limits

A 401(k) also allows much larger contributions than an IRA. Taking the 2022 contribution limits as an example, only $6,000 can be contributed annually to an IRA, while 401(k) contributions are a staggering $20,500. This means you and your employees will be able to contribute significantly more tax-deferable income.

Additional Incentives to Drive Long-Term Retention

In the realm of 401(k)s, cananbis employers can also implement profit sharing, which grants employees a chunk of the profits that the company gained. There are also tax benefits for both the company and the employee if this incentive is introduced.

Bonus: Tax Credits to Cover Set-up Costs

While there are upfront costs associated with starting a 401(k) plan, tax credits like the IRS start-up credit have been introduced to alleviate this exact problem.

The Bottom Line

While the state-administered program offers little set-up commitments and low initial cost, the number of tax incentives and investment options for your cannabis company and employees make a 401(k) a better option in the long run. By working with a provider like LRS, we can help set up a custom plan designed specifically for your cannabis company that adjusts to your needs, both now and as you grow. Take a few minutes to fill out a request for proposal to see just how much we can help you save.

For more tips and information about retirement plans, contact us

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