When it comes to selecting a retirement plan for your small business, it can be overwhelming to realize just how many options are available. For small businesses, the decision often comes down to a debate between the benefits of a SIMPLE IRA and a 401k. According to plan provider Ubiquity, both plans have numerous benefits and it is important to closely analyze the specifics of each plan before implementing one of them for your small business.
What is a SIMPLE IRA for Small Businesses?
A Savings Incentive Match Plan for Employees is a retirement plan that may be a viable option for many small businesses. This type of plan is an appealing choice for many companies because:
- SIMPLE IRA plans are reserved for companies with 100 or fewer employees. Therefore, small businesses who have no plans to scale beyond 100 employees may see the benefit in selecting a SIMPLE IRA.
- There is less of a cost and learning curve for a SIMPLE IRA as compared to a 401k. For small business owners who want to have fewer complications and changes to make when it comes to set up and maintenance of their company’s retirement plan, a SIMPLE IRA may be the right decision.
What is a 401k for Small Businesses?
A 401k is another option that appeals to small businesses for the many benefits inherent in this type of retirement plan:
- 401k plans allow for higher maximum yearly contributions as opposed to SIMPLE IRA plans. The maximum contribution limit for a 401k for those enrolled in the plan is $19,500 (this amount is for individuals who are under the age of 50; the maximum contribution amount allowed for those over the age of 50 is $26,000). Compare this with the contribution limit available in a SIMPLE IRA for employees and employers under the age of 50: $13,500 ($19,500 for those older than 50), and it’s easy to see that 401k plans offer much more in terms of maximum contributions.
- For companies who plan to or want to have the option to grow, 401k plans allow for businesses of all sizes. While SIMPLE IRAs are limited to companies with fewer than 101 employees, 401ks can be used by companies with as few as one employee and by companies with thousands of employees.
- More options for employer matching. 401ks allow the employer to decide whether he or she will match employee contributions. Compared to SIMPLE IRAs, which require that employers match, a 401k allows for more flexibility.
- “Roth” and “Traditional” options available for tax purposes. 401k retirement plans allow for after-tax (Roth) contributions, or pre-tax (traditional) contributions, whereas SIMPLE IRAs have no Roth option.
- If needed, loans can be taken out of a 401k account. SIMPLE IRAs impose harsh penalties when individuals make withdrawals from their account. This is not the case with a 401k. withdrawals can be made from a 401k account for many reasons including loss of job and disability.
As with anything in life, there are various benefits and drawbacks to both SIMPLE IRAs and 401ks. It is important that you closely examine your business to determine which plan will be the best fit for your situation.