Types of Retirement Plans
The comparing retirement plans chart gives business owners the ability to compare different types of plans available to their company.
Types of Retirement Plans
RC2
The comparing retirement plans chart gives business owners the ability to compare different types of plans available to their company.
Click on the PDF link in the green box below.
Rollover Chart
Provides individuals with clarification on the rollover rules for retirement accounts and IRA’s.
Rollover Chart
RC
Provides individuals with clarification on the rollover rules for retirement accounts and IRA’s.
Click on the PDF link in the green box below.
Should I Establish an Employer Sponsored Retirement Plan?
Employer sponsored retirement plans are typically the single most valuable tool for business owners when attempting to:
Reduce their current tax liability
Attract and retain employees
Accumulate wealth for retirement
establishing an employer sponsored retirement plan
Employer-sponsored retirement plans are typically the single most valuable tool for business owners when attempting to:
Reduce their current tax liability
Attract and retain employees
Accumulate wealth for retirement
But with all of the different types of plans to choose from, which one is the right one for your business? Most business owners are familiar with how 401(k) plans work, but that might not be the right fit given variables such as:
# of Employees
Cash flows of the business
Goals of the business owner
There are four main stream employer-sponsored retirement plans that business owners have to choose from:
SEP IRA
Single(k) Plan
Simple IRA
401(k) Plan
Since there are a lot of differences between these four types of plans, we have included a comparison chart at the conclusion of this newsletter, but we will touch on the highlights of each type of plan.
SEP IRA PLAN
This is the only employer-sponsored retirement plan that can be set up after 12/31 for the previous tax year. So, when you are sitting with your accountant in the spring and they deliver the bad news that you are going to have a big tax liability for the previous tax year, you can establish a SEP IRA up until your tax filing deadline plus extension, fund it, and take a deduction for that year.
However, if the company has employees who meet the plan's eligibility requirement, these plans become very expensive very quickly if the owner(s) want to make contributions to their own accounts. The reason is that these plans are 100% employer-funded, which means there are no employee contributions allowed, and the employer contribution is uniform for all plan participants. For example, if the owner contributes 15% of their income to the SEP IRA, they have to make an employer contribution equal to 15% of compensation for each employee who has met the plan's eligibility requirement. If the 5305-SEP Form, which serves as the plan document, is set up correctly, a company can keep new employees out of the plan for up to 3 years, but often it is either not set up correctly or the employer cannot find the document.
Single(k) Plan or "Solo(k)"
These plans are for owner-only entities. As soon as you have an employee who works more than 1000 hours in a 12-month period, you cannot sponsor a Single(k) plan.
The plans are often the most advantageous for self-employed individuals who have no employees and want to have access to higher pre-tax contribution levels. For all intents and purposes, it is a 401(k) plan, with the same contribution limits, ERISA protected, they allow loans and Roth contributions, etc. However, they can be sponsored at a much lower cost than traditional 401(k) plans because there are no non-owner employees. So there is no year-end testing, it's typically a boilerplate plan document, and the administration costs to establish and maintain these plans are typically under $400 per year compared to traditional 401(k) plans, which may cost $1,500+ per year to administer.
The beauty of these plans is the "employee contribution" of the plan, which gives it an advantage over SEP IRA plans. With SEP IRA plans, you are limited to contributions up to 25% of your income. So if you make $24,000 in self-employment income, you are limited to a $6,000 pre-tax contribution.
With a Single(k) plan, for 2025, I can contribute $23,500 per year (another $7,500 if I'm age 50-59 or 64 or over or $11,250 if I’m age 60-63) up to 100% of my self-employment income and in addition to that amount I can make an employer contribution up to 25% of my income. In the previous example, if you make $24,000 in self-employment income, you would be able to make a salary deferral contribution of $23,500 and an employer contribution of $500, effectively wiping out all of your taxable income for that tax year.
Simple IRA
Simple IRA's are the JV version of 401(k) plans. Smaller companies that have 1 – 50 employees that are looking to start are retirement plan will often times start with implementing a Simple IRA plan and eventually graduate to a 401(k) plan as the company grows. The primary advantage of Simple IRA Plans over 401(k) Plans is the cost. Simple IRA's do not require a TPA firm since they are self-administered by the employer and they do not require annual 5500 filings so the cost to setup and maintain the plan is usually much less than a 401(k) plan.
What causes companies to choose a 401(k) plan over a Simple IRA plan?
Owners want access to higher pre-tax contribution limits
They want to limit to the plan to just full time employees
The company wants flexibility with regard to the employer contribution
The company wants a vesting schedule tied to the employer contributions
The company wants to expand investment menu beyond just a single fund family
401(k) Plans
These are probably the most well-recognized employer-sponsored plans since, at one time or another, each of us has worked for a company that has sponsored this type of plan. So we will not spend a lot of time going over the ins and outs of these types of plan. These plans offer a lot of flexibility with regard to the plan features and the plan design.
We will issue a special note about the 401(k) market. For small business with 1 -50 employees, you have a lot of options regarding which type of plan you should sponsor but it's our personal experience that most investment advisors only have a strong understanding of 401(k) plans so they push 401(k) plans as the answer for everyone because it's what they know and it's what they are comfortable talking about. When establishing a retirement plan for your company, make sure you consult with an advisor who has a working knowledge of all these different types of retirement plans and can clearly articulate the pros and cons of each type of plan. This will assist you in establishing the right type of plan for your company.
Michael Ruger
About Michael.........
Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Simple IRA vs. 401(k) - Which one is right for your company?
There are a lot of options available to small companies when establishing an employer sponsored retirement plan. For companies that have employees in addition to the owners of the company, the question is do they establish a 401(k) plan or a Simple IRA?The right fit for your company depends on:
compare simple ira and 401k
There are a lot of options available to small companies when establishing an employer sponsored retirement plan. For companies that have employees in addition to the owners of the company, the question is do they establish a 401(k) plan or a Simple IRA?The right fit for your company depends on:
What are the company's primary goals for establishing the plan?
How much the owner(s) plan to contribute to the plan?
How many employees does the company have?
Do you want to restrict the plan to only full time employees?
The cost of maintaining each plan?
Does the company intend to make an employer contribution to the plan?
Diversity of the investment menu
Below is a chart that contains a quick comparison of some of the main features of each type of plan:
simple ira vs 401K comparison chart
For many small companies it often makes sense to start with a Simple IRA plan and then transition to a 401K plan as the company grows or when the owner intends to start accessing the upper deferral limits offered by the 401(k) plan.
Simple IRA's are relatively easy to setup and the administrative fees to maintain these plans are typically lower in comparison to 401(k) plans. Most Simple IRA providers will only charge $10 - $30 to custody the accounts.
By comparison, 401(k) plans are ERISA covered plans which require a TPA Firm (third party administrator) to maintain the plan documents, conduct year end plan testing, and file the 5500 each year. The TPA fees vary based on the provider and the number of employees eligible to participate in the plan. A ballpark range is $1,500 - $2,500 for companies with under 50 employees.
However, the additional TPA fees associated with establishing a 401(k) plan may be justified if:
The owners intend to max out their employee deferrals
The owners are approaching retirement and need to make big contributions
The company wants to maintain flexibility with the employer contribution
The company would like to make Roth contributions, loans, or rollovers available
WARNING: Most investment providers are "one trick ponies". They will talk about 401(k) plans and not present other options because they either do not have a thorough understand of how Simple IRA plans work or they are only able to offer 401(k) plans. Before establishing a retirement plan it is important to work with a firm that presents both options, helps you to understand the difference between the two types of plans, and assist you in evaluating which plan would best meet your company's goals and objectives.
Michael Ruger
About Michael.........
Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Comparing Different Types of Employer Sponsored Retirement Plans
Employer sponsored retirement plans are typically the single most valuable tool for business owner when attempting to:
Reduce their current tax liability
Attract and retain employees
Accumulate wealth for retirement
But with all of the different types of plans to choose from which one is the right one for your business? Most business owners are familiar with how 401(k) plans work but that might not be the right fit given variables such as:
comparison of different types of retirement plans
Employer sponsored retirement plans are typically the single most valuable tool for business owner when attempting to:
Reduce their current tax liability
Attract and retain employees
Accumulate wealth for retirement
But with all of the different types of plans to choose from which one is the right one for your business? Most business owners are familiar with how 401(k) plans work but that might not be the right fit given variables such as:
# of Employees
Cash flows of the business
Goals of the business owner
There are four main stream employer sponsored retirement plans that business owners have to choose from:
SEP IRA
Single(k) Plan
Simple IRA
401(k) Plan
Since there are a lot of differences between these four types of plans we have included a comparison chart at the conclusion of this newsletter but we will touch on the highlights of each type of plan.
SEP IRA PLAN
This is the only employer sponsored retirement plan that can be setup after 12/31 for the previous tax year. So when you are sitting with your accountant in the spring and they deliver the bad news that you are going to have a big tax liability for the previous tax year, you can establish a SEP IRA up until your tax filing deadline plus extension, fund it, and take a deduction for that year.
However, if the company has employees that meet the plan’s eligibility requirement, these plans become very expensive very quickly if the owner(s) want to make contributions to their own accounts. The reason being, these plans are 100% employer funded which means there are no employee contributions allowed and the employer contribution is uniform for all plan participants. For example, if the owner contributes 15% of their income to the SEP IRA, they have to make an employer contribution equal to 15% of compensation for each employee that has met the plans eligibility requirement. If the 5305-SEP Form, which serves as the plan document, is setup correctly a company can keep new employees out of the plan for up to 3 years but often times it is either not setup correctly or the employer cannot find the document.
Single(k) Plan or “Solo(k)”
These plans are for owner only entities. As soon as you have an employee that works more than 1000 hours in a 12 month period, you cannot sponsor a Single(k) plan.
The plans are often times the most advantageous for self-employed individuals that have no employees and want to have access to higher pre-tax contribution levels. For all intensive purposes it is a 401(k) plan, same contributions limits, ERISA protected, they allow loans and Roth contributions, etc. However, they can be sponsored at a much lower cost than traditional 401(k) plans because there are no non-owner employees. So there is no year-end testing, it’s typically a boiler plate plan document, and the administration costs to establish and maintain these plans are typically under $400 per year compared to traditional 401(k) plans which may cost $1,500+ per year to administer.
The beauty of these plans is the “employee contribution” of the plan which gives it an advantage over SEP IRA plans. With SEP IRA plans you are limited to contributes up to 25% of your income. So if you make $24,000 in self-employment income you are limited to a $6,000 pre-tax contribution.
With a Single(k) plan, for 2016, I can contribute $18,000 per year (another $6,000 if I’m over 50) up to 100% of my self-employment income and in addition to that amount I can make an employer contribution up to 25% of my income. In the previous example, if you make $24,000 in self-employment income, you would be able to make a salary deferral contribution of $18,000 and an employer contribution of $6,000, effectively wiping out all of your taxable income for that tax year.
Simple IRA
Simple IRA’s are the JV version of 401(k) plans. Smaller companies that have 1 – 30 employees that are looking to start a retirement plan will often times start with implementing a Simple IRA plan and eventually graduate to a 401(k) plan as the company grows. The primary advantage of Simple IRA Plans over 401(k) Plans is the cost. Simple IRA’s do not require a TPA firm since they are self-administered by the employer and they do not require annual 5500 filings so the cost to setup and maintain the plan is usually much less than a 401(k) plan.
What causes companies to choose a 401(k) plan over a Simple IRA plan?
Owners want access to higher pre-tax contribution limits
They want to limit to the plan to just full time employees
The company wants flexibility with regard to the employer contribution
The company wants a vesting schedule tied to the employer contributions
The company wants to expand the investment menu beyond just a single fund family
401(k) Plans
These are probably the most well recognized employer sponsored plans since at one time or another each of us has worked for a company that has sponsored this type of plan. So we will not spend a lot of time going over the ins and outs of these types of plan. These plans offer a lot of flexibility with regard to the plan features and the plan design.
We will issue a special note about the 401(k) market. For small business with 1 -50 employees, you have a lot of options regarding which type of plan you should sponsor but it’s our personal experience that most investment advisors only have a strong understanding of 401(k) plans so they push 401(k) plans as the answer for everyone because it’s what they know and it’s what they are comfortable talking about. When establishing a retirement plan for your company, make sure you consult with an advisor that has a working knowledge of all these different types of retirement plans and can clearly articulate the pros and cons of each type of plan. This will assist you in establishing the right type of plan for your company.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
401(k) March 15th Deadline
For all companies that sponsor a 401(k) plan, the March 15th deadline is quickly approaching. March 15th is deadline for processing corrective distributions for failed actual deferred percentage (ADP) test. Failure to meet the deadline will result in a 10% excise penalty for any refund amounts that were due to the Highly Compensated Employees
401k march 15 deadline
For all companies that sponsor a 401(k) plan, the March 15th deadline is quickly approaching. March 15th is deadline for processing corrective distributions for failed actual deferred percentage (ADP) test. Failure to meet the deadline will result in a 10% excise penalty for any refund amounts that were due to the Highly Compensated Employees (HCE).
HCE’s are defined as an employee that is 5%+ owner or $115,000+ in annual compensation. The ADP test compares what the HCE’s deferred into the 401(k) versus what the Non-Highly Compensated Employees Deferred (NHCE). If there is too large of a gap between the average of the HCE’s versus the average of the NHCE, the plan is required to refund contributions to the HCE’s until the contribution level can pass testing. The typical rule of thumb is the HCE’s cannot defer more than 2% of the average of the NHCE’s to pass testing but this amount will vary based on the actual testing results.
If you are a safe harbor plan, you do not have to worry about the March 15th deadline because safe harbor plans are automatically deemed to pass the ADP test regardless of how much the HCE’s defer into plan. This makes safe harbor plans a very effective plan design for owners that are looking to max out their 401(k) deferrals in a given plan year.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
