Benefits of Switching
• Employees can save more: The 2020 401(k) deferral limit is $19,500 ($26,000 for employees age 50 or older) compared to $13,500 ($16,500 for employees age 50 or older) in a SIMPLE IRA.
• Employees can make Roth contributions: After-tax contributions to a Roth IRA are only allowed with a 401(k) plan, which means employees can save on both a pre-tax and after-tax basis to the same plan.
• More employees more costs: A SIMPLE IRA is priced on a per-person basis, which means more employees costs you more. In a 401(k) plan, as the number of employees increase, it becomes more attractive economically to the employer as the associated fees decrease when evaluating on an individual level.
• Allow open multiple employer plans (MEPs): Open MEPs permit unrelated small businesses to band together in an open retirement plan arrangement. This enables companies with smaller plans to take advantage of economies of scale and employ features that typically are available only in larger plans.
• More plan flexibility: 401(k) plans have additional features like more flexibility in eligibility, loans, hardship distributions and varied vesting schedule on employer contributions.
• Employer contribution options: Employer contribution amounts from year to year in a 401(k) plan can range from zero to 25% of compensation, providing the business more flexibility. These plans also allow the employer to set a vesting schedule. The SIMPLE IRA requires employer contributions (2% of compensation or a 3% match on elective deferrals) that are fully vested immediately.
• Stronger oversight: 401(k) plans have more oversight through the plan trustee, administrator, and advisor pertaining to fees, investment selection and employee education. The SIMPLE IRA has very little oversight in these areas.
• Increase the automatic safe harbor deferral maximum to 15 percent: Up from 10 percent, this increase raises the ceiling for employees to take advantage of automatic in-plan retirement saving.
• Tax credits for starting a plan: The IRS offers a small business retirement plan tax credit for business owners creating a 401(k) program for their employees. This tax credit is a direct effort from the U.S. government to make starting a 401(k) plan affordable for small businesses.
Securities and advisory services offered through Commonwealth Financial Network® , Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered by DiMatteo Group – Financial Services are separate and unrelated to Commonwealth. The material provided is for general informational purposes only and does not constitute either tax or legal advice. Dimatteo Group is located at 79 Bridgeport Ave. Unit 1, Shelton, CT. 06484. For question please give us a call at (203)924-4811.