How to Choose Between SIMPLE IRA and 401k – 2023
How to Choose Between SIMPLE IRA and 401k
The SIMPLE 401(k) plan offers small businesses a cost-effective way to provide retirement profits to their employees. It is a qualifying plan that must conform to the rules for required distributions. However, SIMPLE 401(k) plans are not subject to an annual nondiscrimination review. Contributions are immediately vested (100 percent), meaning that an employee entitled to any distributions from the program can withdraw their entire account balance at any time. In addition, the annual contribution limits for a SIMPLE 401(k) plan are lower than for a traditional 401(k) plan.
Are you trying to decide on a retirement plan for your small business? If so, you may be stuck between a few different options. Some of the most common types of small business retirement plans include the Savings Incentive Match Plan for Employees and the 401k.
According to plan provider Ubiquity, both plans have their benefits, just as they have potential downsides. If you’re unsure of which option is best for your small business, check out the following comparison guide!
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What are the Benefits of the SIMPLE IRA?
The SIMPLE IRA offers several compelling benefits.
First and foremost, the plan enables eligible contributors to invest up to $14,000 per year if they are under the age of 50, and $16,500 per year if they are over the age of 50. This is a nice amount of money that can translate to big savings down the road.
Secondly, the SIMPLE IRA is only available to companies with fewer than 100 employees. Therefore, for businesses with no plans to grow past this number of employees, the plan is an excellent option.
Thirdly, SIMPLE IRA plans are, as the name implies, very simple to set-up and maintain. Very little needs to be done by the business owner each year and employees have few responsibilities as well. For those companies that are looking for a retirement solution that will enable them to basically “set it and forget it”, the SIMPLE IRA is a compelling option.
What are the Benefits of a 401k Plan?
Like the SIMPLE IRA, the 401k is a great option for many businesses.
The 401k offers much higher options than the SIMPLE IRA regarding contribution limits. In fact, eligible employees can contribute $20,500 per year if they are under the age of 50, and $27,000 per year if they are over the age of 50.
For companies with big aspirations and planning to grow well beyond 100 employees, the 401k plan is essential. Furthermore, 401k plans can be initiated for tiny companies as well. There is no ceiling or floor regarding the number of employees that can be included in a 401k plan.
Additionally, 401k plans do not impose employer-matching requirements. With a SIMPLE IRA, employers are required to match employee contributions or make nonelective contributions to all employee plans. This is not the case with a 401k. Employers can match employee contributions with a 401k, but there is no legal requirement.
Conclusion
Selecting a retirement plan for your employees is no small task. Many considerations need to be made based on the size of your company, your current needs, and your future plans. For most small businesses, the 401k plan makes sense as it allows for more flexibility and the possibility of future growth. That being said, numerous compliance requirements come with 401k plans, which are not necessary components of SIMPLE IRAs.
If you’d like to discuss your individual needs further, contact a plan provider today!
