If you run a business, you’ve more than likely had to pay special attention to the available retirement plans. After all, you care about your employees and you want them to have good incentives so that everyone in your company maintains a happy relationship for many years.
But when you look through the available retirement plans for small businesses, things can get very confusing, very quickly.
Two of the most common retirement plans: the SIMPLE IRA and the 401k, are the focus of this article.
What is a SIMPLE IRA?
A SIMPLE IRA or Savings Incentive Match Plan for Employees Individualized Retirement Account is one type of retirement plan. This plan is often well-liked by both employers and employees for the following reasons:
- Easy to Set Up and Modify. Initiating a SIMPLE IRA takes very little time and effort. For this reason, many employers elect to offer these plans for their workers. Furthermore, it’s generally fairly easy for employees and employers to log into their account and make changes as necessary whenever they like. Also, there is little paperwork and few forms required in order to maintain tax compliance with this type of plan.
- Employer Matching Required. While company owners may not love this part of SIMPLE IRA, employees are generally very happy to find out that their employers must match their contributions to their retirement plan. There are various ways in which employers can choose to match, but they must make some form of contribution to all eligible employees’ plans.
- Good for Very Small Companies. SIMPLE IRAs can only be used by companies with less than 101 employees. As soon as companies grow beyond this size, they are no longer eligible for the SIMPLE IRA plan. But very small companies need not worry about this requirement, as long as they have no plans to scale up significantly.
What is a 401k?
A 401k is another type of retirement plan which can be utilized by companies large and small. While some companies love the SIMPLE IRA, the 401k plan is often preferred due to the following points:
- No Employer Matching Requirement. Unlike the SIMPLE IRA, 401k plans do not impose matching requirements from employers. Employers may still choose to match employee contributions in some way, but they are not legally required to do so.
- Good for Companies of All Sizes. Single member companies and those with thousands of employees can implement 401k plans. There is no upper or lower limit for company size, so these plans are a good choice for companies who plan to scale.
- High Contribution Limit. Employers and employees younger than 50 can contribute up to $20,500 into their 401k account each year. Those over this age can contribute as much as $27,000 each year.
As you can see, both the SIMPLE IRA and the 401k retirement plans offer numerous benefits to businesses. Depending on the size of your company and your future plans, you could use either plan successfully in your business!