Which retirement plan is right for your business?

Retirement plans get a lot of press lately, and it’s common to hear about them regularly from the media and politicians — especially during discussions about taxes and Social Security. Most media mentions of retirement plans focus on the 401(k), but is this vehicle the right solution for every business and its participants? Let’s look at some of the different retirement plan options you may encounter.

 

401(k)s

The 401(k) has risen to the top of the heap of group retirement plan offerings in terms of popularity. When most people think of retirement plans, they’re thinking of 401(k)s — so it’s no wonder that this plan is the primary vehicle for larger companies to ensure their employees enjoy a dignified retirement. The 401(k) offers ways to save for retirement that are tax-advantaged for participants, investment menus with options often unavailable to retail investors, and strict laws to ensure that no funny business happens with the investors’ money.

401(k)s also allow for high deferral limits (check out our handy chart for IRS limits here), and companies can match employee contributions if they choose to do so. They also allow for pre- and post-tax contributions in a traditional 401(k) or Roth IRA, respectively, that allow participants to choose when they pay taxes on their contributions — whether they defer the taxes to retirement or pay a potentially lower tax amount now and access the money tax-free during their golden years.

 

403(b)s

We’d be remiss if we didn’t mention 403(b) accounts for those who work in public education, churches, or the nonprofit sector. The plans are similar to a 401(k) in that employees of schools and charities can defer some of their salaries into individual accounts and not pay taxes until distributions are taken. Other key differences: Many 403(b) plans aren’t subject to the same regulatory requirements as the 401(k), the investment options differ from those in 401(k)s, and many 403(b)s don’t have employer match contributions.

SIMPLE IRAs

While the 401(k) and 403(b) are terrific options for those businesses mentioned above, what about the newer startups that want a 401(k) but don’t have the time or staff to handle the ongoing regulatory tasks that come with? This is where a SIMPLE IRA shines! SIMPLE IRA plans offer tax-deferred contributions from participants into an investment menu that is used to save for retirement.

The deferral limits are lower for a SIMPLE IRA, but the ongoing workload on a business is much lower too. There is no Form 5500 to file with the Department of Labor, no plan testing, and the out-of-pocket costs and administrative fees to businesses are significantly lower than those on a 401(k). For many smaller businesses, the SIMPLE IRA is a great starting point for implementing a retirement plan for employees. It allows the business to understand how group retirement plans work and see how their employees and business itself benefit.

If you have questions about which plan is right for you, we’re always happy to set up a time to discuss which plan might benefit your business.