With so many retirement plan options for small business, it can be confusing to know which retirement plan is the best fit. When you compare 401(k), SEP and SIMPLE IRA plans available for businesses with fewer than 50 employees, the choice becomes much easier.
401(k) plans, for example, offer the highest contribution limits, but also more flexibility in terms of costs, taxes and penalty-free access to funds for loans if an emergency arises before retirement (59 1/2). Here are some of the key differences among the plans:
| 401(k) | SIMPLE IRA | SEP IRA | |
| Who can contribute | Employee; Employer optional | Employee & Employer | Employer only; must contribute for all eligible employees |
| Max employee contribution | $17,500 w/$5,500 catch-up if over 50 years old | $12,000 w/$2,500 catch-up if over 50 years old | Not applicable |
| Employer contributions | Optional, up to 25% of W-2 payroll with a $52K cap ($56,500 if over 50 years old) plus profit sharing options | Required match of 100% first 3% of participating employee contributions or 2% of all eligible employee salaries | Optional, but only way to fund; up to 25% of W-2 payroll with a $51K cap |
| Vesting timing for employer contributions | Multi-year options or immediate | Immediate | Immediate |
| Access to funds before age 59½ | Penalty-free loans or 10% penalty for early withdrawal | 25% penalty for withdrawing within first 2 years of participating; 10% thereafter | 10% penalty for withdrawal before age 59½ |
Note: The Roth option available with a 401(k), which has no income limitation, is another advantage not available in the IRA options. As the costs for small business 401(k)s have dropped substantially, there aren’t many reasons to consider anything else.
Still not sure what option is best for your business? Give us a call or send us an email. We’d be happy to explain each of the options and review your current plan, or to help you choose a brand new plan if you don’t already have one in place. We’re here to answer all of your questions.
To your wealth,
Joe Maas, CFA, AVA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance
