With all of the retirement plans available to small businesses, it can be difficult to navigate the many options. In this article, with additional information provided by Ubiquity, we will compare the SIMPLE IRA and the 401k, and how each may benefit small businesses.
Comparing and Contrasting SIMPLE IRAs and 401k Plans for Small Businesses
SIMPLE IRAs (Savings Incentives Match Plan for Employees) and 401ks differ from each other in a variety of ways. Below, we have outlined 7 of the most important differences between the two plans:
- Maximum Contribution. Employees can contribute $13,500 and $19,500 for SIMPLE IRAs and 401k plans respectively. When employees reach the age of 50, they can contribute $19,500 a year for SIMPLE IRAs and $26,000 a year for 401k plans.
- Company Growth Considerations. SIMPLE IRAs are limited to companies with fewer than 100 employees (self-employed individuals are unlikely to go for this option though, as there are better options available for single-member companies and freelancers). Once the size of the company is greater than 100, the business is no longer eligible for a SIMPLE IRA. On the other hand, all businesses, regardless of size, are able to implement a 401k plan.
- Employer Contributions. With a SIMPLE IRA, employers are required to match employee contributions. In contrast, 401k plans do not require that employers match employee contributions.
- Vesting is synonymous with ownership, when it comes to retirement plans. To “vest 100%” means that the employee owns all of the funds in the account. SIMPLE IRA plans require that employees vest immediately, whereas 401k plans offer numerous options for vesting.
- Plan Formation and Modification. One of the benefits of the SIMPLE IRA is that it is extremely easy to create and maintain. Additionally, these accounts do not require annual IRS compliance testing. 401k plans, in comparison, often require testing and generally are slightly more complicated to maintain.
- Tax Implications. SIMPLE IRA’s have no option for “Roth” contributions. 401k’s offer both Roth and pre-tax contribution options. Having flexibility in your retirement plan is often very tempting to employees.
- Availability of Loans. In difficult times, there is no option to take a loan from a SIMPLE IRA account. However, with a 401k plan, a contributor does have the option to take out a loan when needed.
Which is the Better Option for My Small Business: A Simple IRA or a 401k Plan?
Your unique business needs will dictate which type of plan will be best for you to pursue. When compared across the 7 categories listed above, the 401k is the superior option in almost all ways. However, this does not mean that a SIMPLE IRA may not be an appropriate choice for you. When deciding on your business’s retirement plan, it’s critical that you generate a list of pros and cons between the various options and select based upon that data. After you’ve done this, reach out to a plan provider and discuss your questions and concerns with the professionals. Plan providers can help you make a decision that will be beneficial for both you and your employees.