5 Reasons a 401(k) Is Better Than a SIMPLE IRA

Thriving Businesses Rely on 401(k)

The 401(k) plan is one of the most powerful tools a business owner can use to lower their personal taxable income and maximize their savings for retirement.

When your business is growing, your team is expanding, and your income is increasing to match, you may find that the SIMPLE IRA you once relied on to put aside some money for the future just isn’t able to keep up.

Here are the top five reasons why a 401(k) plan with Fisher Investments can do more for you—and your business—than a SIMPLE IRA.

Save More for Retirement

A 401(k) plan allows employees and the business owner(s) to save more. 401(k)s that also include a profit sharing option allow for combined employee and employer contributions up to $69,000 per year or $76,500 if age 50 or older. But, a SIMPLE IRA only allows you to save up to $16,000 per year or $19,500 if age 50 or older.

A 401(k) can have more plan types added to help you save more for retirement (and on taxes) when your business is ready. This is not possible to do with a SIMPLE IRA. Here’s an example comparing your potential savings with a SIMPLE IRA, 401(k) with profit sharing and a 401(k) with profit sharing and Cash Balance Plan.

A business owner can save significantly more when they add a Cash Balance Plan to their 401(k). Pair this plan option with your 401(k) to save up to an extra $409,000 per year above and beyond what a traditional 401(k) allows. In some circumstances, that means you can unlock up to $485,500 per year in tax-deferred retirement savings!¹

Pay Fewer Taxes

A 401(k) plan is leagues ahead of a SIMPLE IRA when it comes to how much money you can save in taxes. With all of the add-ons and optional plan features available, a 401(k) offers one of the biggest tax benefits available for business owners. The tax reduction comes in the form of a pension deduction (the employer contribution and cash balance part of the contribution). It is the only tax-deductible expense business owners can keep. To put this into further relief, this is the only expense business owners can take out of their business’s pocket and put in their own personal pocket—and not pay taxes on it until withdrawn in retirement.

A 401(k) provides business owners three ways to save on taxes:

1. Personal Tax Deduction: Owners can make a tax-reducing contribution to their plan as an employee. Up to $30,500 a year with catch-up for age 50 and over. This deduction comes out of personal taxes.
2. Business Tax Reduction: Then, owners can make a tax-deductible contribution to their plan as the employer. Up to $43,500 with a 401(k) profit sharing plan and up to $441,500 with a 401(k) profit sharing + cash balance plan.
3. Start-up Tax Credit: There are tax credits for setting up a new retirement plan. 100% tax credit for the greater of $500 or $250 for each non-highly compensated with a cap of $5,000.

Flexible Savings Options

401(k) plans allow you and your employees to save with a Roth option as well as a pre-tax option. With a SIMPLE IRA, you are limited to pre-tax contributions. For those early in their careers who would rather pay taxes on their retirement savings now when they’re in a lower tax bracket, Roth contributions can be made on an after-tax basis in addition to standard pre-tax contributions. This is not an option in SIMPLE IRA.

The Roth option is also great for highly compensated employees looking to diversify the tax strategy surrounding their retirement savings, giving them the option to pay some taxes on their savings now to spread out their overall tax burden. This is especially beneficial if they make more than $161,000 per year, because they can’t contribute to a Roth IRA due to income restrictions. This makes the Roth option in a 401(k) a big advantage over a SIMPLE IRA.

Get a Safety Net

When life happens, sometimes it can make sense to borrow against your retirement savings. If you choose, a 401(k) plan can offer a safety net to employees and owners alike in the form of 401(k) loans. These loans can be used to finance a new business venture, or even provide short-term relief when the unexpected occurs—like a global pandemic. SIMPLE IRAs do not allow loans.

Empower Employees to Save More

In order to save enough for a comfortable retirement, business owners and employees need toplan in advance for how much they need to save for retirement. SIMPLE IRAs only allow participants to save up to $16,000 per year, which for many isn't enough to keep them on track to retire. Not only does a 401(k) have much higher contribution limits, but with a 401(k) plan you can select options that will encourage employee saving in ways that SIMPLE IRAs can’t. Auto-enrollment is an optional 401(k) feature that allows the employer to automatically enroll eligible employees into the plan (unless they proactively opt out). This feature makes it easy for employees to save for retirement. Auto-escalation is another optional 401(k) feature that automatically increases employees saving rates over time, helping them easily stay on track for retirement. Neither of these options are available in a SIMPLE IRA.

Learn how Fisher 401(k) Solutions can help you and your employees maximize retirement savings.

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¹ Assumes owner is age 70 or older.

² ~10% of eligible employee compensation given as Safe Harbor & Profit Sharing contributions