Are you a business owner who is struggling to decide whether to start a 401k or SIMPLE IRA for your company? This is a tough dilemma, and one that requires a significant amount of research and reflection.
Based on your company’s individual needs, both plans may be beneficial. Let’s take a look at the differences between to the two plans so that you can make an informed decision and set your company up for success.
Large and Small Companies
SIMPLE IRAs are reserved for companies with 100 or fewer employees. In fact, even if a company started a SIMPLE IRA when they had fewer than 100 employees, they will no longer be eligible for the plan if they grow beyond that number of workers.
401k plans, on the other hand, can be used by single-member companies, small businesses, and massive enterprises. These plans can accommodate just about any size business and are a great option, regardless of the size of the company in question.
Contribution Limits
Contribution limits differ depending on the age of those who are contributing to the plan. For those under the age of 50, the contribution limit is $13,500 for the SIMPLE IRA and $19,500 for the 401k.
For those over the age of 50, the contribution limit is $19,500 for the SIMPLE IRA and $26,000 for the 401k.
Clearly, the 401k plan allows for higher maximum contributions than does the SIMPLE IRA.
Matching Contributions
With certain types of retirement plans, employers are legally required to match employee contributions. The SIMPLE IRA is one such plan.
401k plans, however, have no such requirement. Employers can choose whether or not they will match employee contributions with 401k plans. This allows employers to provide compelling incentives to employees while also deciding how much they will contribute to their employees’ plans.
Set Up Considerations
On the surface, it can seem like an unnecessary factor to discuss with regards to retirement plans. Does it really matter if a plan is easy to set up and maintain?
For many busy business owners, the answer is yes.
The SIMPLE IRA requires very little effort to set up and even less so to maintain. The plan is incredibly easy to manage and employers love it for said reason.
401k plans can often have onerous requirements and are generally subject to yearly compliance testing by the Internal Revenue Service. This testing is to ensure that the plan is structured fairly for all employees. Failing said tests creates a nightmare scenario for business owners in which copious amounts of paperwork and fines are levied on the business.
Conclusion
So, which plan should you select for your business?
There is no easy answer to that question. Depending on the size of your company, you may not even have the option of starting a SIMPLE IRA. But in most other situations, you’ll need to weight the pros and cons of both SIMPLE IRA and 401k.
In the end, what matters most is how your plan will benefit your company and your employees.