How Does SIMPLE IRA or 401k Help My Business?

When you are running a business, the day-to-day concerns tend to take up most of your time. After all, you need to make sure that deadlines are met and that all of your operations are running smoothly, regardless of the nature of your business.

But while attending to your daily business tasks is important, it is equally critical that you give thought to your company’s retirement plan. In researching these plans, you’ve more than likely come across two of the most common options available for small businesses:

  • 401k Plans.

Like everything in life, both of these plans have benefits and downsides. This guide will provide an overview of both types of plans by comparing them across a number of categories.

401k vs. SIMPLE IRA: Contributions

According to the experts at Ubiquity, 401k plans allow for higher contribution limits as compared to SIMPLE IRAs. Specifically, employees who are younger than 50 years of age can contribute up to $19,500 per year. Conversely, employees of the same age who contribute to a SIMPLE IRA, are limited to contributions of $13,500 per year.

For employees contributing to a 401k who fall above this age range, the maximum savings are $26,000. Again, this significantly surpasses the limit for those 50+ contributing to a SIMPLE IRA, which caps contributions at $19,500.

401k vs. SIMPLE IRA: Company Size and Expansion

Companies with a single employee as well as companies with many hundreds of employees can implement a 401k plan. Unfortunately, this is not the case when it comes to SIMPLE IRA plans. The SIMPLE IRA is only available to companies who employ fewer than 101 employees. That being said, the SIMPLE IRA is not the best option for self-employed individuals either.

While your company may employ only a handful of people currently, you’ll want to think about your plans for the future. Do you think you’ll expand and hire more people? Do you hope to grow the reach of your business significantly? If so, you’ll likely want to stay away from SIMPLE IRA plans and opt for the 401k.

401k vs. SIMPLE IRA: Employer Matching

Employer matching is another extremely important consideration when it comes to retirement plans. While you’ll more than likely want to match employee requirements in order to offer compelling incentives to current and prospective employees, you have the option of whether or not you will do so with a 401k plan.

With a SIMPLE IRA, you are required to match employee contributions in some capacity.

Bottom Line

So, you’re faced with two retirement planning options for your company: the 401k and the SIMPLE IRA. Which one do you choose?

In many aspects, the 401k is the more compelling option. The plan offers many benefits, some of which were not even touched on in this article.

On the other hand, the SIMPLE IRA is easy to set up and may be a good option, depending on your company’s needs.

In the end, if you are looking for a plan that will require little effort from you to maintain and set-up, and if your company will never expand beyond 100 employees, the SIMPLE IRA may be right for you. In all other cases, strongly consider the 401k.

Post Author: Hattie Braden