A SIMPLE IRA can be easier and cheaper than a 401(k), adviser says

  • A SIMPLE IRA is generally easier and cheaper to operate than a 401(k) plan, the IRS said.
  • It is a good alternative for employers who want to offer a pension scheme in today’s hot labor market.
  • There are trade-offs such as lower annual contribution limits.

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Small business owners today may feel pulled in two directions: stuck between wanting to offer a retirement benefit to their workers but feeling unable to pay the costs associated with a 401(k) plan.

But entrepreneurs wary of the affordability of maintaining a 401(k) plan can instead consider an alternative workplace retirement plan known as a SIMPLE IRA, said Marguerita Cheng, a certified financial planner based in Gaithersburg, Maryland.

The plans — formally known as a Savings Incentive Match Plan for Employees — do not bear the start-up and operating costs of a “conventional” retirement plan, according to the IRS.

Employers are under more pressure these days to offer a retirement benefit to stay competitive in a hot labor market, Cheng said. Job openings have been historically high and turnover has increased.

“If you have a younger workforce or you don’t have a (retirement) plan, it’s a great way to start offering one,” said Cheng, CEO at Blue Ocean Global Wealth and a member of CNBC’s Advisor Council.

SIMPLE IRAs are also “a great stepping stone” to a 401(k) in the future if an employer wants to make their offering more “robust,” she said.

SIMPLE IRAs are generally available to any small business with 100 or fewer employees. The company cannot have any other pension scheme.

The plans require an employer contribution — equivalent to a 401(k) match — each year. The amount depends on a formula chosen by the employer, but will not exceed 3% of a worker’s annual compensation.

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SIMPLE IRAs are “easy and inexpensive to operate,” and don’t carry certain requirements like the discrimination test that 401(k) plans generally do, according to the IRS. Employers can also get a tax deduction for their contribution.

In the case of a SIMPLE IRA, employees choose to contribute money – it is not mandatory for them to save. However, the plans have lower annual contribution limits compared to 401(k) plans: up to $15,500 compared to $22,500 in 2023, respectively.

Each plan allows workers age 50 and older to contribute additional money via “catch-up contributions” (an additional $3,500 in a SIMPLE IRA and an additional $7,500 in a 401(k) plan).

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