For small business owners and their employees, a SIMPLE IRA plan is often the best retirement planning solution. But as your company grows, it is possible to outgrow your SIMPLE IRA. At that point, the benefits of a 401(k) become clear.
To start, remember that a SIMPLE IRA is only available to companies with fewer than 100 employees. So you really can quite literally outgrow it! It can be difficult for your employees to let go of their familiar plan, so it will help to point out how a 401(k) can offer additional benefits to them..
Who doesn’t want to save more for retirement? That’s exactly what you can do with a 401(k). Under the SIMPLE plan, employees are limited to a $12,500 annual tax-advantaged contribution. When you switch to a 401(k), that limit increases to $18,000 annually. This not only allows for greater potential for retirement savings; it can decrease employees’ tax burdens as well.
A 401(k) plan also offers greater flexibility for your employees. You can structure the plan to allow for profit sharing incentives. Loans are also permitted under a 401(k), whereas they are not allowed via SIMPLE IRAs. Your employees might enjoy the peace of mind of knowing that they could borrow from their retirement fund in an emergency.
Under a 401(k), employees are also allowed to fund multiple retirement funds. This provision is an additional form of security not offered under the SIMPLE plan, which restricts contributors to one retirement account only.
Finally, if any of your employees have reached age 50, they can make additional catch-up contributions to boost their retirement preparedness. Currently, they can make a $3,000 catch-up contribution each year, under their SIMPLE IRA. That limit would double to $6,000 annually under a 401(k).
If you’re thinking of transitioning from a SIMPLE IRA to a 401(k) for the 2018 tax year, keep in mind that the deadline is November 2 of this year. You are also required to give your employees a 60-day notice before the start of the year in which the SIMPLE will no longer be offered.
As you plan for a retirement plan changeover, remember to point out how the new plan benefits your employees. Change can be scary, but satisfied employees are loyal employees.