There’s a retirement plan available to small business owners that few people are familiar with. It’s called a Savings Incentive Match Plan for Employees, or “SIMPLE” IRA.
What Makes These Plans So Attractive?
Cost and Simplicity
The more commonly used 401(k) plans typically have expensive annual testing requirements to ensure they remain in compliance with ERISA.
A SIMPLE IRA plan, however, avoids these testing requirements, and therefore has very low administrative fees compared to a 401(k) plan, potentially saving the business owner thousands of dollars each year in fees. In fact, picking the right provider for your SIMPLE IRA plan can result in zero on-going administrative fees for the employer (by using Vanguard for example)
As usual though, saving money comes with a compromise. So here’s a general overview of the features of a SIMPLE IRA that you’ll want to know:
- Must have fewer than 100 employees
- The employer is required to provide either:3% matching contribution, or
- 2% contribution to all employees (regardless of participation)
- All contributions are 100% vested
- The contribution limits are lower in a SIMPLE IRA than in a 401(k) plan
- Taking money out of a SIMPLE IRA plan within the first 2 years can result in penalties that are larger than 401(k) plans
While you are limited to the choices above, that can also be very appealing to many business owners. There’s no complex profit sharing or vesting structures to worry about, just a few simple choices and you’re up and running.
When small business owners are considering implementing their first retirement plan, they should always consider whether a low-cost SIMPLE IRA is a better solution than the more common 401(k).
Tim Plachta, CFP® is the founder of several Austin-based business, including Reliant Wealth Management, Reliant Consulting Partners, and Ruby’s Rainbow, Inc.. He helps small business owners around the country increase profitability through expansion, contraction, or increased operational efficiency.