401(k) or SIMPLE IRA: Which is the right plan in 2023?

Let's clear up the confusion about 401(k) retirement plans and SIMPLE IRA plans. How are they different? Which one is right for your company and your situation? What should you keep in mind when considering a SIMPLE IRA?

What is a SIMPLE IRA?

"A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.”

That’s directly from the IRS website, essentially a SIMPLE IRA is tailored to small businesses and self-employed individuals. An employer may only sponsor a SIMPLE IRA plan if they have 100 employees or fewer.

Without the higher start-up and operating costs of some conventional retirement plans, the SIMPLE IRA can be a quick solution for offering some type of retirement benefit.

Key things to keep in mind:

- A company must adopt a Form 5304-SIMPLE, Form 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document.

- Employer cannot have any other retirement plan

- No filing requirement for the employer

Contributions:

- Employer is required to contribute each year either a matching contribution up to 3% of compensation (not limited by the annual compensation limit), or 2% nonelective contribution for each eligible employee

- Employees may elect to contribute- Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA moneyHow is it different from a 401(k) retirement plan?

There are many differences between a SIMPLE IRA and a more traditional 401(k) retirement plan. Employee contribution limits, catch-up contributions and Non-discrimination testing requirements are different for each plan type.

See the comparison chart below for a side-by-side look at how each plan differs from the other.

Which is right for your business or your clients?

SIMPLE IRA plans allow smaller employers to avoid the more complex structure and regulations, but will limit the available contribution employees and employers can make. When it comes down to it, a SIMPLE IRA is best suited for a business that is just that. Simple. Just by eliminating the need for non-discrimination testing the plan becomes much less of a burden.

However, if a company wants to provide flexibility, efficiency, and greater opportunity for contribution benefits, a traditional 401(k) is still the more preferable option. If a business can afford the time and effort a 401(k) plan can provide amazing returns over time for a company’s unique goals.

In conclusion, it’s important to take into consideration the need for simplicity or flexibility to determine which plan is the best option.

Want to get a 401(k) or SIMPLE IRA plan started for your organization?

Reach out to our team and we’ll get you started!

This information is provided as general guidance and may be affected by changes in law or regulation. It is not intended as accounting or legal advice. If you have questions please reach out to our team.