At one point or another, many business owners are faced with the decision of which type of retirement plan they should offer to their employees. Complicating the matter further, is the fact that there are many options available.
In this guide, we’ve compared two of the more common retirement plan options: the SIMPLE IRA (Savings Incentive Match Plan for Employees Individualized Retirement Account) and the 401k. Depending on the needs of your business and your employees, either option may be more suitable for you. With this additional information provided by Ubiquity, let’s take a look at each plan as compared across a number of categories.
Contributions
- SIMPLE IRA: With a SIMPLE IRA, qualifying employees can contribute up to $13,500 if they are under the age of 50 and as much as $19,500 if they are 50 or older.
- 401K: With a 401k plan, qualifying employees can contribute as much as $19,500 if they are under the age of 50 and up to $26,000 if they are over 50.
Company Size and Plans for Growth
- SIMPLE IRA: An unfortunate limitation of the SIMPLE IRA is that the plan only accommodates businesses that maintain fewer than 100 employees. Once your business has grown beyond 100 employees, you can no longer offer the SIMPLE IRA as a retirement option.
- 401K: In contrast to the SIMPLE IRA, the 401k retirement plan can be used by businesses with a single employee, or by massive enterprises with hundreds of workers.
Employer Matching
- SIMPLE IRA: An important consideration for business owners when selecting a SIMPLE IRA is that of required contribution matching. Employers must match employee contributions or, alternatively, they may make non-elective contributions for all employees who are eligible for a SIMPLE IRA plan.
- 401K: Businesses who offer 401k plans to their employees have no matching requirement. The business owner may choose to match employee contributions or they may not; offering significant flexibility in the structure of the plan.
Tax Implications
- SIMPLE IRA: There is only a “Traditional” option when businesses select a SIMPLE IRA. This means that all contributions must be made pre-tax and then the money is taxed as it is withdrawn in retirement. Many individuals prefer the “Roth” option, which enables contributors to pay taxes up front and withdrawal the money tax-free in retirement.
- 401K: 401k plans allow for either Roth or Traditional options, enabling increased choice in how employees make contributions and pay taxes.
Loans
- SIMPLE IRA: When it comes to a SIMPLE IRA, contributors are unable to take out loans.
- 401K: Loans are available with a 401K retirement plan.
Conclusion
While the 401K is generally considered to be the better option, especially across many of the categories listed above, it’s important to carefully consider the needs of your business. You may prefer the structure of the SIMPLE IRA and you may choose this option for your business. Depending on your company’s needs, your financial situation, and your future business plans, both the 401K or the SIMPLE IRA are excellent choices for businesses.
Ready to start a retirement plan for your company? Call a plan provider today!
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