Are you stuck between choosing a SIMPLE IRA or a 401k retirement plan for your company? The similarities between these two types of plans are many, and depending on the nature of your company, one might be a better choice for you.
In this article, we will attempt to demonstrate the differences between the SIMPLE IRA and the 401k so that you can make an informed decision about this aspect of your company.
What are the Benefits of Starting a SIMPLE IRA?
SIMPLE IRA plans can offer many benefits to small businesses.
For one, the SIMPLE IRA plan is reserved exclusively for companies who employ fewer than 101 employees. This can be both a benefit or a drawback to the plan, depending on your thoughts about your company’s future.
For example, if you currently employee 90 workers, you should think hard about what you plan to do in terms of hiring over the next few years. If your business will pretty much remain as is, then a SIMPLE IRA plan could be a great fit for you. If, however, you think you might need to hire some more employees, you may get close to the cap imposed on SIMPLE IRAs and have to switch your type of plan.
Luckily, a significant benefit of the SIMPLE IRA is how easy it is to set up and manage. It takes very little time to start a SIMPLE IRA and there is almost no paperwork or annual reporting that needs to take place. Additionally, the plan provider Ubiquity has some helpful information on these differences their website here: https://www.myubiquity.com/small-business-401k/401k-vs-simple-ira-which-is-better-for-small-business/
What are the Benefits of Stating a 401k?
401k plans afford companies many benefits as well.
For companies both large and small, 401k plans can provide a great incentive for employees. Regardless of if you run a single member company or a giant enterprise, your 401k plan can accommodate any size business.
Furthermore, 401k plans do not require matching, as SIMPLE IRAs do. Employers often choose to match employee contributions in some way, but they are free from the specific matching requirements that are characteristic of SIMPLE IRAs.
In terms of taxes, 401ks are definitely the better choice. These plans allow employees to choose whether they will make Roth contributions or traditional ones. This means that their contributions are made after-tax and pre-tax respectively. Giving employees a choice of how they handle their tax burden is always a benefit, as many people have very specific beliefs about how tax laws may change in the future.
So, Which Should You Choose: SIMPLE IRA or 401k?
Unfortunately, it’s hard to make a blanket statement about which plan is better for an individual business. Both plans offer unique benefits and can be compelling choices for companies of all kinds.
If you run a very large company, however, you have to choose a 401k by default. The member limit for SIMPLE IRAs is rigid and companies cannot exceed 100 employees if they wish to continue to offer this type of plan.
It’s a good idea to talk with some plan providers and hear what they have to say about the nuances of each type of plan. Retirement planning can be stressful, but the more knowledge you can gain about the available plans, the better!