One of the benefits offered by employers in the United States is employer-matched retirement savings and investments. There are a variety of financial products and options on the market for employers and beneficiaries but Simple IRA's and 401k retirement accounts are some of the most commonly used. These plans are relatively inexpensive to set up and maintain while offering reasonable rates of return and deferred taxes on money contributed to the account.
Options for IRA's and 401k's fall under the SIMPLE (Savings Incentive Match Plan for Employees) program which requires certain stipulations which all parties must follow to take advantage of the benefit. For instance Simple IRA plans require an employer to pay either a matched contribution up to three percent of the worker's income, or a flat contribution of two percent to all eligible employees. Even employees who make no contribution to their account are entitled to the employer's flat contribution under an applicable simple IRA.
401K plan employer contributions are left up to the discretion of the employer. However, both plans include contribution limits, and the limits of Simple IRA plans allow for a more limited yearly investment than 401k plans do.
The plans both offer deferred income taxes to the beneficiaries of these retirement contribution funds. This means that for 401k's, the contribution to the employee's paycheck is deducted and installed tax-free into the 401k account where it can grow without being taxed until it is withdrawn by an eligible party. This beneficiary must then pay income tax based on their normal tax bracket. Simple IRA's take your contribution before it is ever paid to the employee and does not become taxed until withdrawal.
Simple IRA Features
A Simple IRA retirement plan guarantees joint contributions with employers as a requirement. This is designed to benefit employees of smaller businesses with fewer than one hundred employees or companies with only one employee. This benefit is a real value to employees with more static incomes and offers a benefit to both employers and employees.
All employees who are 21 years of age and who earned at least five thousand dollars at the company the previous year are eligible for an employer contribution to the account. Younger employees are sometimes offered a plan before it is required. The limit for employer-matched IRA contributions is capped at an annual total of $285,000 in 2021. Even Self employed individuals can use the Simple IRA plan, making both employer and Employee contributions, thus taking advantage of the tax benefits of the plan for their small business. Employee contributions are capped at $13,500 per year but catch-up payments can be made of up to $3000 dollars more annually.
Simple 401K Features
Simple 401k plans allow for higher contributions to an employee's retirement account annually. The investment limit is $19,500 per year, but for those over fifty years of age catch-up payments are allowed up to $6,500 a year. 401K's also include options for company profit sharing which differ between employers. Like the Simple IRA plans, Simple 401k's are for companies below the one hundred employee threshold, and employers may not maintain any other retirement plan for their employees.
There are many Pros and Cons to both Simple IRA plans and Simple 401k plans. By exploring the benefits of both of these plans we hope to assist you in understanding how they work so you can make a more educated and well-rounded decision when it comes to planning for your retirement. To learn more about your options, get started by scheduling a free consultation with 19:21 Consultants.