When Should You Retire Your Simple IRA?

In 1996 the Savings Incentive Match Plan for Employees (aka SIMPLE IRA) was introduced as an alternative to offering a 401(k) plan. Yet a lot has changed over the last 25+years – innovation, technology and fiduciary solutions have made offering alternative structures a viable option for small businesses. So, how do you know when you have outgrown the SIMPLE IRA structure?

It is certainly true that SIMPLE IRAs have fewer rules and are less complicated to administer than 401(k) plans – this has made them a convenient option for small businesses looking to offer employees a way to save. However, those employees looking to maximize savings have lower contribution limits and less options than 401(k) plan participants. And employers are required to make contributions.

Let’s compare the differences between a SIMPLE IRA and 401(k) Plan:

*Limits for 2024

A SIMPLE plan is not subject to nondiscrimination tests and there is no requirement to file IRS Form 5500. If your population is comprised of mostly low-income earners and you have less than 100 employees, the savings restrictions may not warrant a change. However, in today’s ultra-competitive job market, prospective employees may expect greater saving potential, flexibility and the more robust planning tools that can be offered through a 401(k) plan provider.

If you are concerned about the fiduciary liability and operational challenges of converting to a 401(k) plan, you may consider outsourcing investment and administrative decision making to a third-party discretionary fiduciary – a 3(38) fiduciary for investment decisions and 3(16) fiduciary for administration. These services may cost more, but thanks to industry consolidation and fee compression the cost is much lower than 25 years ago. Added bonus -- if paid directly by the employer, these may be tax deductible expenses.

Transitioning from a SIMPLE IRA to a 401(k) plan has never been more flexible. Thanks to SECURE 2.0, employers can terminate a SIMPLE IRA and replace it with a safe harbor 401(k) any time during the year. Prior to this legislation there was a calendar year requirement

Considering a 401(k) plan for your organization? Share some information here and we would be happy to generate an analysis

Source: Exploring Qualified Retirement Plans, Raymond James 2021; What’s Changing in 2024 Under Secure 2.0, Plansponsor.com

This material is for informational and educational purposes only and is not intended to provide, and should not be construed as, or relied upon for, tax, legal, investment or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction, including, for example, establishing a retirement plan for your company or retaining a service provider for your company's retirement plan.