Broker Check

Simple IRA VS 401K

| October 20, 2020

Should I switch from a Simple to a 401K plan?

As an employer you made a decision to offer a Simple IRA retirement plan for your company and employees.  Reasons for this decision could have included

1-Cost effective, 2-Offer a competitive benefits package, 3-To save for retirement. 

All are valid reasons but does that mean that the Simple IRA is still the best plan to have?   At Innovative Financial Group-Atlanta, we are a full service independent agency that answers this question and many others.  This article will discuss in more detail reasons to consider changing to a 401K plan. 

Let’s start the discussion around plan differences.   Although we could get into the weeds with each, I will provide a high level overview

  • Contribution Limits –
    • *Simple IRA is $13,500 with catch up provision(age 50 and up) of $3000,
    • *401K is $19,500 with catch-up provision (age 50 and up) $6500
      • *Both are indexed each year for inflation
    • Matching features –
      • Simple IRA – Between 1%-3% for active participants. Employer does need to offer 3% in 3 of the 5 years for the plan. 
      • 401K- Safe Harbor design either 3% for all employees regardless if they are participating in plan or up to 4% for active participants.
      • Non-Safe Harbor – Discretionary for plan sponsors each year along with testing
    • Loan Provisions-
      • Simple IRA – no loans available
      • 401K – Loans can be made available
    • Costs-
      • Simple IRA – Start up and annual costs generally run from $10 to $20 for each participant along with A share costs up to 5.75%
      • 401K – Start up generally run from $2000 to $4000 and annual costs range from $950 to $1500

Now that we know some of the differences, let’s get back to my original question, “why should you consider changing from a Simple IRA retirement plan to a 401K plan design”.   As we all know, this year is a year like no other and most of us will never forget it.  Part of the SECURES act the government came out with has incentives for business owners to offer a 401K plan.   As you read above, it can be costly to put a 401K in place and spending extra money in this economy doesn’t make sense.  So the Act offers tax incentives up to $250 per non-highly compensated employee (NHCE is less than $125,000 in compensation) up to $5000 per year, limited to 50% of plan costs .  Plus you can use this tax deduction each year for the first 3 years.  Here's an example. 

  • Business with 10 NHCE – 10x$250 = $2500 is maximum tax credit
  • New plan costs $3500. $1750 (50% of costs) is eligible for tax credit
  • Totals - $3500 - $1750 = $1750 total costs (that’s a 50% discount)
  • And you will be able to get this tax credit each of the first 3 years.

To add to the savings, record keepers are coming out and offering start up plans with no hard cost as well. 

With the tax credits to start a plan and the higher contribution limits to put more money away for your retirement, (Do I need to remind you that the more you put into the plan, the bigger the tax savings you will have for the year.) now is a great time to explore your options and see if it makes sense.  Please give us a call or email and ask for an analysis from one of our qualified advisors.    Mark Widlowski – 678-338-4438,  Stay safe and stay healthy