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