Broker Check

Retirement Plans

Simple IRAs

Advantages

  • Perfect plan for an employer with fewer than 100 employees
  • Very easy to set up
  • Low fees
  • Simple ongoing maintenance
  • Employee contributions are tax-deductible
  • Employer contributions are deductible business expenses
  • No IRS reporting requirements


Disadvantages

  • Employer matches a certain percentage of the contributions of the employees
  • Large penalty for early withdrawals in the first two years - up to 25%
  • Cannot roll contributions to other retirement plans in the first two years
  • Employees cannot take loans against their funds (could be seen as an advantage)

  SEP (Simplified Employee Pension)

Advantages

  • Great fit for businesses and self-employed people
  • No limit on the number of employees you must have to participate
  • Very simple to set up
  • Lower start-up costs than other retirement plans
  • No IRS annual filing requirement
  • Employer contributions are deductible business expenses
  • Can contribute up to 25% of an employee's pay
  • Employees are 100% vested immediately
  • Employer contributions are not included in the employee's gross compensation
  • Catch up contributions for those over 50 are allowed


Disadvantages

  • Employers are the only ones that con contribute to the plan
  • Employees are not eligible until they have worked at least three of the last five years
  • Loans are not available (could be seen as an advantage)

401k Plans

Advantages

  • Provides more options; employee contributions can be pre-tax or post-tax
  • Employee pre-tax contributions are tax deductible
  • All employer contributions are deductible business expenses
  • Employees can choose how much they contribute
  • Employers may provide a matching contribution
  • High contribution limits
  • Employee contributions are taken automatically as a payroll deduction
  • Employee contributions will have no bearing on the amount of money you receive from Social Security
  • Your funds are protected against bankruptcy
  • Employee may borrow against the money invested in the 401k
  • Can be designed to fit the needs of the employer


Disadvantages

  • Failing to repay loans creates high penalties
  • Employees may not be able to contribute as much as they'd like
  • Employers may decide to provide no match to invested funds
  • Are more costly to set up and administer than SIMPLE IRAs and SEPs
  • Requires annual IRS reporting
  • Employers are considered fiduciaries of the plan

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