Benefits of a SIMPLE IRA and 401K for Your Employees

When running a business, you have to make many different decisions every day. Some of these decisions affect day-to-day operations and some of them are bigger picture concerns, such as retirement planning for your employees.

In deliberating between the many retirement plan options available, you’ll likely come across two of the most common retirement plans: the SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) and the 401k plan. Both of these retirement plans offer benefits to employees and businesses, but depending on your company’s unique situation, you might benefit from one plan type more than another.

With this additional information from Ubiquity, let’s take a look at how the SIMPLE IRA and 401k compare across a variety of categories.

Contribution Maximums

The SIMPLE IRA allows employees to contribute up to $13,500 (if they are younger than 50) or $19,500 (if they are over the age of 50) per year. 

The 401k allows significantly higher contributions. Specifically, employees can contribute $19,500 (if they are younger than 50) or $26,000 (if they are over the age of 50) per year.

Company Growth Considerations

For companies that have no thoughts of scaling past 100 employees, the SIMPLE IRA is a viable option. This plan is only available to companies with fewer than 100 workers. However, for self-employed or very small companies, this might not be the best plan available on the market.

On the other hand, 401k plans can be used by companies with 1 employee, 10 employees, or thousands of employees. 401k plans impose no maximums or minimums with regards to number of employees in a company. 

Employer Matching

SIMPLE IRA plans necessitate that employers match their employees’ contributions. This can be done through a few different matching strategies or through non-elective contributions.

Conversely, 401k plans do not require employers to match employee contributions. Many employers choose to match in order to make their business more competitive to prospective employees. However, this decision is completely voluntary.

Tax Concerns

Taxes are always a major concern when it comes to anything dealing with finances. 

SIMPLE IRA plans only allow for traditional contributions. This means that taxes on contributions are made in retirement and not when the actual contributions are made. 

Alternatively, 401k plans enable employees to choose between traditional or Roth contributions. Roth contributions are those that are made “after-tax”. This means that taxes are already accounted for when employees are ready to start making withdrawals in their retirement.

Plan Management

While many of the categories discussed in this article tend to favor the 401k plan, when it comes to plan management, SIMPLE IRA’s tend to be much less of a hassle. 

SIMPLE IRA plans require few steps to set-up and maintain the plans and they are not subject to annual IRS compliance testing.

401k plans tend to be slightly more labor intensive in terms of set-up and management. Further, the IRS will generally conduct yearly testing on businesses with 401ks to ensure that all contributors are being treated fairly.

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