SIMPLE IRA vs. 401(k): Which one is right for you?

If you are an employer, especially if you are an owner of a small business, you are most likely looking for ways to maximize your and your employee’s personal retirement savings dollars while also saving money in taxes.

For simplicity, you might decide on a SIMPLE IRA as they are, aptly, relatively simple to put in place and maintain.  The main requirement is employer funding:  this type of plan requires a mandatory employer contribution.  The employer can either match up to 3% of the employees pay OR a contribute a sum equal to 2% of the employees salary (regardless of the employee contribution).

The 401(k) is more of a time commitment to set up and maintain, but offers the employer more flexibility.  You can decide to match or not match, offer a Roth option…or not amongst other features.

Here is a chart that will help crystallize the key differences between the two plans to help you understand which one is a better fit for your business:'

Also, if you currently have a SIMPLE 401(k) in place and would like to switch to a 401(k) in 2021, you must act fast as deadlines are quickly approaching. The IRS rules state a SIMPLE IRA must be the sole retirement plan in effect during the year – meaning, you have to terminate the plan and start the 401(k) in the new year.

Here are the deadlines for this year you should be aware of if you are considering this change:

• November 2, 2020: to terminate a SIMPLE IRA, you must first notify plan participants about the termination 60 days in advance. This date is 60 days before December 31, so it is the LATEST you can notify participants.
  
• December 31, 2020: you must terminate your SIMPLE IRA on this date – not before, and not after – for 2020.

So how does an employer decide which plan is best for you?  Here are a few key questions to consider:

1. How many employees do you have?  This is the most straightforward, but not to be overlooked, factor.  If you have over 100 employees, then you need to set up a 401(k).
   
2. Is your budget consistently able to support the match?  If your profits fluctuate and/or prioritizing the match is not something you want to do, then starting with a 401(k) is going to be your best bet as you can adjust the employer contributions.
   
3. What are your primary objectives in setting up the plan? This question is more complex but helps illuminate the right path for you.  If your primary objective is to help the owner of the company sock away dollars for retirement, then the higher contribution limits of the 401(k) (and the option to add a profit-sharing and cash balance option) are more attractive.  If your primary objective is to make your overall benefits package more attractive with the least work possible, then the SIMPLE IRA is the way to go.

The SIMPLE IRA and the 401(k) are both great options for businesses. This guide laid out the key differences between the two as well as key questions to help you think through which one is a better fit for your business. 

As a note, these might not be your only options if you are self-employed or a small business owner – there are other options such as a SEP account or a 403(b) if you have 501(c)3 status. 

Please reach out with any questions!