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401k or SIMPLE IRA: Corporate Retirement Plans Revealed

| September 02, 2014
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When it comes to retirement plans and retirement planning, nothing is easy.  There are a few options for businesses when they are looking to establish a retirement plan for their employees and business owners.  There are many reasons to setup a plan, including attracting and retaining employees, offer tax advantages, and as a convenient way for employees to save for retirement.  Two of the main corporate retirement plans available for companies with fewer than 100 employees are SIMPLE IRAs and 401ks.  The basics of any corporate retirement plan are that they allow for employees to defer a portion of their current income to appreciate tax-deferred until the money is needed in retirement.

The Traditional 401k is the most widely understood plan available.  It allows for employees to contribute a portion of their pre-tax income and grow it tax-deferred until at least age 59 ½, when the income can be distributed and taxed at the employees’ future income tax rate.  Roth options are available in some plans that allow for contributing after-tax income to the plan, having the money appreciate tax-deferred, and taking the money out tax-free when used for a qualified retirement expenses.

Key Points of the Traditional 401k:

  • Companies can choose to contribute and/or match what their employees defer
  • Matching contributions can be subjected to a vesting schedule
  • Companies are subject to annual discrimination testing in their plans
  • Employer contributions and match can be deducted as a business expense
  • Maximum employee deferral of $17,500 with $5,500 extra for employees over 50 to “catch-up”
  • Many investment options

The SIMPLEIRA (Savings Incentive Match Plans for Employees IRA) is another option available for employers and is designed as a cost-effective way to deliver retirement benefits.  Like the 401k, they allow for employees to contribute a portion of their pre-tax income and grow it tax-deferred until at least age 59 ½, when the income can be distributed and taxed at the employees’ future income tax rate.  SIMPLE IRAs can only be used by companies with fewer than 100 employees who have received at least $5,000 in compensation from the employer in the prior year.

Key Points of the SIMPLE IRA:

  • Companies are forced to contribute at least 2% of employee salaries to the plan for each employee earning more than $5,000 the prior year OR make a matching contribution of at least up to 100% up to the first 3% of compensation
  • Contributions are 100% immediately vested
  • Not subject to discrimination testing
  • Employer contributions and match can be deducted as a business expense
  • Maximum employee deferral of $12,000 with $2,500 extra for employees over 50 to “catch-up”
  • Fewer investment options
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