When setting up a retirement plan for your business, you have options. In most cases, it will come down to a choice between a 401(k) and a SIMPLE IRA. As with most big financial decisions, there will be pros and cons that you can find with each plan and there will be several factors you need to consider before choosing which is right for you.
At Illumination Wealth, our top priority is helping clients make the right financial decisions—whether they’re individuals saving for retirement or business owners establishing retirement savings plans. Hopefully, this article will provide some helpful insight you can use.
First, let’s look at some of the key differences between SIMPLE IRAs and 401(k) plans. A SIMPLE IRA will generally be easier to set up and/or terminate. Also, no third-party administrator (TPA) is required. This makes them fairly easy to manage and there are no administrative costs associated with the plan, but there are more limitations on how much someone can contribute.
On the other hand, a 401(k) with profit sharing features requires the services of a TPA to operate it. This means there will be administrative costs and the plans will be requirements to manage it. However, the primary benefits of a 401(k) plan is that it will allow for much larger contributions and the income tax benefits are more favorable, as well.
At face value, it would seem that an employer would generally prefer a SIMPLE IRA because it’s cheaper and, well, simpler. Meanwhile, it’s easy to assume the employees will prefer a 401(k) if it allows them to contribute more toward their retirement savings.
The number of employees on the plan, the employee benefit objectives for your company and the amount you are able to contribute as an owner (and your tax brackets) are all factors that should be considered when deciding between a SIMPLE IRA or 401(k). A small practice with low contribution ability from the owners will likely find a SIMPLE IRA a better option while a larger business or a sole proprietor with a high income may prefer the 401(k). In a lot of cases, SIMPLE IRAs work well as a good startup plan while ultimately a 401(k) is usually necessary as the business grows.
Having a fiduciary financial advisor on your side will be helpful in this decision because they can provide you with a detailed side-by-side analysis that reviews your specific financial data in both SIMPLE IRA and 401(k) scenarios. They can break down short-term and long-term projections under both plans and help you determine which makes the most sense in your business and personal situation.
For help with your business retirement savings plan, your personal retirement plan or any of your wealth management needs, count on the team at Illumination Wealth to offer personalized guidance for life’s most important financial decisions. Contact us today to learn more.