What a SIMPLE IRA or 401k Does for Your Business?

If you are considering a retirement plan for your small business, you have likely come across two of the most common plans: SIMPLE IRAs (Savings Incentive Match Plan for Employees) and 401ks. Both plans have their benefits, but which one is the right option for your business?

In this article, we will outline the differences between the two retirement plans so that you can decide which option will work best for your company.

Contribution Maximums

With a SIMPLE IRA, employers and employees are able to contribute up to $13,500 if under the age of 50, and $19,500 if over the age of 50. Compare this with a 401k, where contributions can be made up to $19,500 for those under the age of 50 and $26,500 for those 50 and older.

Company Size

SIMPLE IRAs are only available to businesses with 100 or fewer employees. Once the company grows beyond that size, a business is no longer eligible for the SIMPLE IRA. 

A 401k, on the other hand, can be used by companies with one employee or thousands of employees. Therefore, if you have any plans of expanding your business to include over 100 employees, the 401k is the smarter retirement plan option.

Employer Matching Requirements

When it comes to employer matching responsibilities, the 401k offers more flexibility than the SIMPLE IRA. With a 401k plan, employers can decide whether or not to match employee contributions. SIMPLE IRAs do not afford employers this choice: contributions by employees must be matched by the employer when it comes to the SIMPLE IRA.

Plan Set-up

The process for setting up and maintaining a SIMPLE IRA tends to be easier than it is for a 401k. Additionally, SIMPLE IRA plans are not required to pass the annual IRS compliance tests that 401ks are subject to. 

Vesting Options

“Vesting” is synonymous with “ownership” when it comes to retirement plans. The vesting schedule can weigh heavily on employees’ decisions about whether or not they will remain with a company.

SIMPLE IRAs require that employees vest immediately, whereas 401k plans offer the option to vest immediately, on a cliff, or on a  graded schedule.

Tax Considerations

401ks offer both “Traditional” and “Roth” options which allow for pre-tax and after-tax contributions respectively. This is not the case with a SIMPLE IRA, which only affords traditional, pre-tax contributions.

Loan Options

If you are in a bind and need to withdrawal money from your retirement account, a 401k plan allows you to do so. Unfortunately, with a SIMPLE IRA, loans are not an option.

Bottom Line: Should I Choose a SIMPLE IRA or a 401k For My Business?

When compared across the categories described in this article, the 401k plan tends to be the more appealing option for businesses. However, depending on your needs, the size of your company, and many other factors, a SIMPLE IRA may be a better choice for you. It is important to sit down and define what you need and want in your company’s retirement plan so that you can make the best choice for you and your employees. 

There are many ways to help you narrow down this decision. Financial plan experts, like the ones at Ubiquity, offer many different consultations for what suits your business best. Between SIMPLE IRA and regular 401K or one of the many other nuanced options that sound right for you. 

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