Back in September, we briefly reviewed some differences in various 401k and IRA plans, and have since been asked to provide some more information on each of the plans. Below is a combined review of the SEP-IRA, Individual 401k, and SIMPLE IRA. We will review pros and cons, as well as key points of differentiation between each of the plans.
As a reminder, 401k and IRA plans are subject to numerous and complex rules, regulations and tax qualification requirements. Be sure to consult with a qualified professional before making ANY decisions or changes to your 401k or IRA.
SEP-IRAs work well for any employer looking to provide all employees with a retirement benefit, including self-employed individuals. Employees who are eligible must be 21 or older, earn at least $600 for the tax year, and have worked there for at least 3 of the past 5 years. Employer contributions are not required every year, but are deductible. Additionally, no loans are permitted from SEP-IRAs. The biggest point of differentiation for the SEP-IRA is that employees are not allowed to contribute.
- Easy to set up
- Low administrative costs
- Flexible annual contributions
- Higher contribution Limits (the lesser of 25% of the employee's compensation or $55,000 for 2018)
- No Form 5500 required
- No discrimination testing required
- Employees are not allowed to contribute
- Employer must contribute equally for all eligible employees
- SIMPLE IRA
There are a few points of differentiation between the SIMPLE IRA and the SEP-IRA. For example, both employee and employer can contribute to the SIMPLE IRA plan. Additionally, the employer is required to match dollar-for-dollar of the employees contributions up to 3% of their compensation, or 2% of all eligible employee salaries. Lastly the SIMPLE IRA has a 25% penalty for withdrawing within the first 2 years of participating.
This starter plan encourages employee participation and can be done by employers with 100 or fewer employees. Eligible employees must have earned at least $5,000 for the past 2 years and are expected to earn at least $5,000 in the current year. Employees can decide how much they want to contribute, and employer contributions are deductible. No loans are permitted from a SIMPLE IRA.
- Easy and inexpensive to set up and operate
- Employees allowed to contribute
- No 5500 form required
- No discrimination testing required
- Lower contribution limits ($12,500)
- Employer must make either a 3% match or 2% non-elective contribution
- An employer cannot fund any other additional employer sponsored retirement plan in the same year as funding a SIMPLE IRA
- INDIVIDUAL 401K
One of the biggest benefits of a 401k over the alternate IRA options is the contribution limits. Both employees and employers can contribute. Additionally 401ks offer more flexibility to manage business costs, taxes and enable access to funds via a loan in the case of an emergency. Business owners are able to contribute as both an employer and employee, and there is more flexibility in setting eligibility in terms of age and service requirements. Contributions can be tax deductible or contributed in Roth by participants. Contributions from the corporation are tax deductible, and, depending on how the plan is set up, discretionary from year to year
- Highest employee contribution limits ($18,500)
- Highest total contribution limits (Employers can contribute up to 25% of compensation, but total contributions of employee and employer cannot exceed $55,000)
- Some plan contributions can be pre-tax (Traditional) or post-tax (Roth)
- Loans and hardship withdrawing is available on some plans
- More complex administration work involved and annual filing of 5500 to DOL
- Few Brokers/Advisors truly specialize and understand the in’s and out’s of how to customize a 401(k) to meet small business owner needs, forcing the vast majority of business owners into a high-cost cookie-cutter solution
- Due to the complexity, DOL regulations, and multiple moving parts, a 401(k) is not ideal for a “do it yourself” retirement plan
Understanding the differences in retirement plans is important. To ensure you have the best plan for you and your team, contact us today for complimentary plan review.
If you are interested in changing YOUR business' retirement plan, we can help! For example, our team can show you how to move your SEP to a 401k in 5 easy steps - just click the button below and reach out to our team today.
For a complimentary 401k situation analysis and tips on best practices, contact Tyler at Pharmacy 401k by calling 843-873-4420 or email email@example.com.
For more information on our custom approach and to discover your pharmacy's optimal plan, click here to download our company census tool or contact us by emailing firstname.lastname@example.org or call Tyler Campbell at 843-720-3756.