Starting a retirement plan can be a confusing, but important decision. Whether you’ve been researching for a while, or just starting out, choosing the right plan can determine how effective the overall plan is.
Here is a brief overview of how both plans are similar, and where they differ. Each company has different needs, but by using this quick guide, hopefully you can make a more educated decision on which plan is right for you.
How 401(k)s and SIMPLE IRAs Work
Both plans allow for two types of contributions to a retirement investment account. An employee is allowed to defer part or all of their paycheck (subject to limits below) towards the account.
This contribution is not subject to federal income taxes when it is deposited, and grows tax deferred until the employee makes withdrawals in retirement.
Both plans allow for a tax-advantaged employer contribution to their employees’ accounts. In the SIMPLE IRA, a minimum of a 1% match of gross compensation is required.
At the very basic level, both plans are similar. However, there are some distinct differences that separate the two.
Deferral Limits
401(k)s allow employees to contribute up to $19,500 per year in 2020. This deferral limit is typically increased each year under IRS rules.
SIMPLE IRAs allow employees to contribute up to $13,500 per year in 2020.
Both plans allow for “catch-up” contributions for employees over 50. In a SIMPLE IRA, this is an additional $3,000, while in a 401(k) it is $6,500.
Types of Deferrals
In a SIMPLE IRA there is only one type of employee deferral, a pre-tax deferral. In a 401(k) you may also add a Roth deferral option, which takes advantage of a post-tax employee contribution which is not taxable in retirement. This Roth contribution is not subject to the same income limits as a Roth IRA, so there is an advantage for high income earners who wish to utilize the post tax aspect of Roth.
In most 401(k) scenarios for small businesses your plan will desire to elect what is called a safe harbor provision. This provision eliminates complicated testing which can prevent an owner from being able to contribute to the plan themselves. This provision usually entails a 4% matching contribution to employees, which can add to the overall cost of the plan.
Costs
SIMPLE IRAs and 401(k)s have different cost structures. SIMPLE IRAs have an administrative fee based on your payroll frequency, but at most cost the employer $50 or less on average per month. 401(k)s typically will add a $100 base fee per month to that.
Both plans may be eligible for employer tax credits which can offset the cost of having a plan for the first three years you have the plan established. This can vary based on the employee count, and we ask that you verify with your accountant your company’s eligibility for such credits.
Employees have their own account fees which start at $48 per year and 1.32% of assets per year in a 401(k) plan, or $48 and 1.00% of assets per year in a SIMPLE IRA account.
Setup
Both plans are relatively easy to set up and only require a minimal amount of time. In either case, we find it best that you speak with one of CorPay Retirement Service’s* licensed retirement plan experts to determine which plan works best for you!
Schedule a consultation today to see which plan is the best for your company and your employees!
* Investment advisory services provided by Actify Investor Retirements, LLC dba CorPay Retirement Services. Actify Investor Retirements, LLC is a Registered Investment Advisor. Information presented is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
