Is your SIMPLE ready to graduate to a 401k?

Posted In: Business Retirement

If you have a growing business with a SIMPLE IRA retirement plan, it may be time to “graduate” to a 401(k) plan. In an era dominated by big, expensive company 401(k) plans, the Small Business Job Protection Act of 1996 introduced a new type of retirement plan for small businesses called the SIMPLE IRA.  The legislation allowed the owners of small businesses (those with less than 100 employees) to establish a retirement plan for their employees without having to file an annual statement with the IRS.  Many years have passed since the introduction of the SIMPLE IRA, and, in that time, the costs associated with 401(k)s have decreased substantially. What hasn’t changed, though, is that employers with SIMPLE plans have limited flexibility when compared to 401(k) plans.  For example, employers have mandatory contribution options, which must be one of the following: 3% dollar-for-dollar match or 2% non-elective. The employee contribution levels are also lower: $13,000 (or $16,000 if age 50 or older) for a SIMPLE versus $19,000 (or $25,000 if age 50 or older) in a 401(k).  Regular 401(k)s also have the following advantages over a SIMPLE IRA:

 

  • Post-tax Roth contribution option (allows the accumulations of tax-free assets)
  • No mandatory employer contributions
  • Flexible employer match options
  • Loan and Hardship withdrawal provisions are allowed
  • Vesting schedule on employer contributions (helps with employee retention)
  • Ability to add Profit-Sharing contributions to get maximum contribution up to $56,000 (or $62,000 if age 50 or older)

 

Tax law does not allow a business to have another retirement plan in the same year that it has a SIMPLE IRA retirement plan.  So, if you think that it might be time to upgrade to a 401(k) plan for your business, now is the time to consult with Ambassador Advisors’ retirement plan professionals to decide if it makes sense to make the transition on January 1, 2020.

 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.

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