Small business owners often start with a SIMPLE IRA to kickstart their retirement savings journey. However, as their businesses grow and they approach contribution limits, it becomes evident that they need a more robust retirement savings solution. In this article, we explore why converting to a 401(k) can significantly benefit your business owner clients.
Why Choose a 401(k) for Your Business Owner Clients
Let’s compare the advantages of a SIMPLE IRA and a 401(k) plan:
|
Feature |
SIMPLE IRA |
401(k) with Profit Sharing |
The 401(k) Profit Sharing Advantage |
|
Contribution Limit (includes catch-up) |
$19,000 |
$73,500 |
$54,500 more in savings |
|
Profit Sharing |
Not Permitted |
Available |
Ability to tailor contributions to specific groups |
|
Employer Contributions |
Mandatory contributions by the employer |
Optional contributions by the employer |
Flexibility in incentivizing retention |
|
Vesting Schedule |
No Vesting Schedule |
Vesting Schedule Available |
Encourages employee retention |
|
Eligibility |
<100 Employees |
Suitable for ALL Employer Sizes |
Scalable with business growth |
|
Tax Credits |
N/A |
Potential $1,000 tax credit per employee contribution* |
Tax incentives for businesses |
*See SECURE 2.0 Act Contribution Tax Credit
As evident from the table, a 401(k) plan with profit-sharing offers several advantages over a SIMPLE IRA, making it a compelling choice for business owner clients:
- Higher Contribution Limit: The 401(k) plan allows for significantly larger annual contributions, providing your clients with the potential to save $54,500 more for retirement compared to a SIMPLE IRA.
- Profit Sharing: Unlike a SIMPLE IRA, a 401(k) plan with profit-sharing permits tailored contributions, allowing businesses to reward specific groups or individuals based on performance.
- Employee Contributions: The 401(k) plan offers flexibility as it doesn’t mandate employee contributions. This flexibility can be used to incentivize employee retention and reward top talent.
- Vesting Schedule: With a 401(k) plan, employers can implement vesting schedules, which encourage employee retention by providing ownership of employer contributions over time.
- Suitable for All Sizes: While SIMPLE IRAs are limited to businesses with fewer than 100 employees, 401(k) plans are scalable and suitable for all sizes of employers, adapting as the business grows.
- Tax Credits: Businesses transitioning to a 401(k) may be eligible for tax credits, reducing the cost of adoption.
If you’re considering converting your client’s SIMPLE IRA to a 401(k), it’s crucial to act promptly. To transition an existing SIMPLE IRA to a 401(k), Plan Sponsors must send participant notices announcing the plan’s termination by the November 2nd deadline.
Don’t miss out on the opportunity to provide your business owner clients with a more robust retirement savings solution. Contact us today to explore the benefits of transitioning to a 401(k) plan.