Do you have a SIMPLE IRA? If your answer is “yes,” there’s a good chance that you established the plan during the early days of your business. And it has probably served you well up until this point.
The SIMPLE (an acronym for “Savings Incentive Match Plan for Employees”) IRA is the bread-and-butter plan for many small businesses. It is available to employers with less than 100 employees that do not sponsor other qualified retirement plans, such as a 401(k) plan or a cash-balance plan.
The issue? The SIMPLE IRA is often not sustainable for a growing small business. As a company scales, so does its workforce and retirement plan needs. A natural transition plan for many businesses is the 401(k), which can bring numerous benefits:
401(k) plans can offer sponsors and participants many valuable plan design features, such as more choices for eligibility criteria, a variety of vesting schedules, various employer contributions, allocation methodologies and levels, automatic enrollment, hardship distributions and participant loans, among others. These enhancements can bring greater flexibility within the plan, which can give way to more retirement savings — creating mutual benefits for business owners and their employees. Additionally, a 401(k) plan can be designed to cost less than a SIMPLE IRA, since 401(k) plans are not required to provide employer contributions, whereas SIMPLE IRAs require a fully-vested employer contribution.
Higher deferral limits
For 2017, participants can defer up to $18,000 into their 401(k) plans, with a $6,000 catch-up deferral (a total of $24,000) for those age 50 and older. This is a substantial boost compared to deferral limits for SIMPLE IRAs, which sit at $12,500 and $15,500, respectively. The difference might not seem substantial, but it can go a long way in helping those who want to ramp up more savings for their retirement.
Business owners with 401(k) plans can offer more than one retirement benefit option to employees, including popular cash-balance plan opportunities that are not available to owners with SIMPLE IRAs.
…and don’t forget Roth contributions!
That’s right — participants have the ability to make both traditional and Roth contributions to a 401(k) plan. SIMPLE IRAs, on the other hand, don’t offer Roth contributions. Having a Roth option can be a huge differentiator for employees, particularly from a tax perspective.
If you’re hoping to convert your SIMPLE IRA into a 401(k) plan effective December 31, the deadline to notify your employees is November 2. Are you ready to make the change?