401(k) Advantages Over SEP and SIMPLE IRAs
It may seem confusing trying to figure out what sort of retirement plan is the best
fit for your business. Yet when you compare a 401(k) to SEP and SIMPLE IRA options,
the main plan options for businesses with less than 25 employees, it becomes a much
easier decision.
401(k)s
not only offer higher contribution limits, but also offer more flexibility in design
to manage business costs, taxes, and enable penalty-free access to funds via a loan
if an emergency arises before reaching retirement age (59½). A summary of
important differences include:
|
|
401(k)
|
SIMPLE IRA
|
SEP IRA
|
|
Who can contribute
|
Employee; Employer optional
|
Employee & Employer
|
Employer only; must contribute for all eligible employees
|
|
Max employee contribution
|
$17,000
w/$5,500
catch-up if over 50 years old
|
$11,500 w/$2,500 catch-up if over 50 years old
|
Not applicable
|
|
Employer contributions
|
Optional, up to 25% of W-2 payroll with a
$50K
cap ($55,500
if over 50 years old)
plus profit sharing options
|
Required match of 100% first 3% of participating employee contributions or 2% of
all eligible employee salaries
|
Optional, but only way to fund; up to 25% of W-2 payroll with a
$50K cap
|
|
Vesting timing for employer contributions
|
Multi-year options or immediate
|
Immediate
|
Immediate
|
|
Access to funds before age 59½
|
Penalty-free loans or 10% penalty for early withdrawal
|
25% penalty for withdrawing within first 2 years of participating; 10% thereafter
|
10% penalty for withdrawal before age 59½
|
Also the Roth option available with a 401(k), which
has no income limitation, is another advantage not available in the IRA options.
As the costs for small business 401(k)s have dropped substantially, there aren't
many reasons to consider anything else.