The designation scheme in the world of retirement plans can mislead even the smartest business owners. How do you know which one is the best? The first and correct answer to the question is always "it depends". There is no one-size retirement plan for all, and a combination of plans might be the best approach. But when you have to choose one or the other, don't always choose the simplest method. Get a guide and find a solution that goes beyond the name.
Take SIMPLE IRA and 401 (k). 401 (k) has become one of the most popular retirement investment plans that exists and is synonymous with employee contribution plans in many American companies. But it has developed a reputation for being expensive and difficult to manage, especially for small and medium enterprises. This is largely compared to plans such as SIMPLE IRA, which I believe can reduce costs for small business owners by lowering the contribution limit and administrative costs for entrepreneurs with fewer than 100 employees. This can give the employer the vehicle to provide cost-effective retirement savings that do not significantly affect the bottom line.
But reducing costs is only part of the business, and choosing for a SIMPLE IRA plan can limit many of the options offered by 401 (k). For example, even though SIMPLE IRA can be used for a smaller number of employees, employers have far less control over which employees can choose the plan. According to the IRS, employees who have received (and are expected to receive this year) $ 5,000 or more as compensation from employers for the previous two years can participate. A 401 (k) can be much more selective in the age of an employee (more than 21 years) and in the working period (one year). Therefore, even if 401 (k) includes additional costs for business owners, the flexibility that it provides to focus on higher income employees can provide significant value to the company. In addition, a high employee contribution limit of $ 18,500 for 2018 or $ 19,000 for 2019 in 401 (k) can also be an advantage, with additional benefit sharing options available for 401 (k) packages in addition to equalization options from employers that can allow contributions the total increases more than is possible with a SIMPLE IRA. In a SIMPLE IRA, workers under the age of 50 have a maximum contribution of $ 12,500. Those aged 50 and older can get a contribution of $ 3,000 to catch up, with a total maximum of $ 15,500. By 2019, the maximum is $ 16,000. Managing the benefits of the 401 (k) contribution option is what allows business owners to make higher limits function on their behalf.
This can take pressure from the business owner and can allow the money to be channeled back to the business and other retirement plans. Additional benefits in 401 (k) are loan terms, so money that is deferred in the owner's retirement account can be used to obtain additional capital lines to grow the business or provide financial assistance. This cannot be in accordance with the SIMPLE IRA's plan, which does not provide such provisions.
So, what makes a SIMPLE IRA simple? In essence, my experience is easy to configure and inexpensive to operate. However, many business owners who choose this type of pension program can find themselves with far less flexibility in employer contributions, fewer features and lower contribution limits than other pension programs, such as 401 (k). Employers who spend time making 401 (k) plans along with additional retirement plans, such as cash balance plans or 401 (h), can often improve their ability to finance their pensions.
I might still ask, "But is 401 (k) really the best plan?" The answer does not change: it depends. It makes sense to review your current plan and really look to see what will give you the best tax advantages.
Some of the main initial questions that must be asked when trying to decide which plan is the best for your company are:
• What are the company's main goals for making plans?
• How many owners plan to contribute to the plan?
• What administrative costs can you want to pay?
• Do you need loan terms in the plan?
The demographics of the employees of each company are different, so after you answer these basic questions, you can begin to determine the right plan for your employees.
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