Should your company start a 401(k), SIMPLE IRA, or SEP IRA?
Starting a retirement plan for your company is a fantastic thing to do. It’s a win-win for both your employees and your company. There is a $6.6 trillion gap between what Americans will need in retirement and what they actually have. Half of all workers aren’t saving anything, and only 1 in 2 actually have access to a workplace retirement plan.
Having a retirement plan at your company will, of course, help attract talent, but you will also be lowering your company’s taxable income. That’s right, your company’s contribution to employee retirement accounts are not taxable and are deducted from your P&L. Who doesn’t want to pay less taxes?
In the realm of retirement accounts, your company has a couple common options: a 401(k), SIMPLE IRA, and SEP IRA. Why use one over the other? What are the differences? Let’s find out!
Employee contribution limits
The most important difference is contribution limits.
As of 2021, employees can contribute up to $19,500 in a 401(k).
In a SIMPLE IRA, it’s only $13,500.
In a SEP IRA, it’s $0. You read that right. SEP IRAs only allow employer contributions.
Company contributions
The next main difference are when it comes to company contributions.
With a 401(k), your company can choose whether it wants to make any company contributions, which aren’t mandatory. Here at OctaveWealth, we give you a lot of options to choose from and we’ll help you create a 401(k) plan that is really customized to your company’s needs.
With a SIMPLE IRA, you don’t have any flexibility. You must either make a 3% match for every employee who contributes, or a 2% contribution for every employee regardless of whether or not they contribute.
With a SEP IRA, you must contribute the same amount to every employee and it must be between 0%-25% of employee compensation.
Investment fund fees
This one seems subtle but can make a difference for your employees and their savings. The mutual funds available to SIMPLE IRAs and SEP IRAs are more expensive than those available for a 401(k). SIMPLE IRAs and SEP IRAs are individual accounts for each employee and don’t qualify for the minimums needed to purchase the less expensive share class of mutual funds.
Because 401(k) plan assets are pooled, they can meet the minimums for the less expensive share class of mutual funds. The difference between the most expensive share class and the least expensive share class of a mutual fund can be as much as 1%!
Employer responsibilities
Lastly, the amount of responsibility you will have is different. You would typically hire a service provider to run a 401(k) plan for you, but with a SIMPLE or SEP IRA you’d have the responsibility for running them in-house.
SIMPLE IRAs and SEP IRAs became popular decades ago because they cost a lot less than 401(k)s at the time and promised easier admin. However, the time it cost to your company to do all the admin tasks in-house can add up to a lot. Providers like OctaveWealth now make 401(k)s much more affordable and easier for you by integrating with your payroll system.
The winner?
Ultimately the choice boils down to what is best for your circumstances. But overall, we believe a 401(k) is the best option due to flexibility for your company, higher contribution limits for your employees, and lower-cost investment options. That $6.6 trillion retirement gap needs to be filled, and in our opinion a 401(k) plan is the best tool for the job.
Disclaimer
This material is not intended to give tax, legal oar investment advice. The opinions expressed are as of the posting date and may change as subsequent conditions vary. The information and opinions contained in this post are derived from sources deemed by OctaveWealth to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by OctaveWealth, its officers, employees or agents. Reliance upon information in this post is at the sole discretion of the reader.
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