If you’re a small business owner with less than 100 employees, a SIMPLE IRA plan, well, simply makes sense. And, they’re quite easy to set up (at least with Wealth Stack). However, if you’re new to retirement accounts, you might be thinking, “But isn’t a 401(k) the best option?”
Our answer to that is another question. Why do you think a 401(k) is the best option? Is it simply because that’s the most well-known retirement plan out there? It’s true that 401(k)s are pretty popular. In fact, 31% of the adult population invests in a 401(k). However, they’re usually the top choice because they’re one of the only choices offered by most businesses, and that makes them an “easy” option. It doesn’t, though, make them the best option.
What’s the best option for your retirement account? Really, it depends on your age, income, and overall financial goals. However, there are many reasons why a Wealth Stack SIMPLE IRA account is better than a 401(k). Here are eight of ‘em.
Before we dive into what makes these accounts so diverse and lucrative, let’s give you a crash course on what SIMPLE IRA accounts are. SIMPLE stands for Savings Incentive Match Plan for Employees and it’s a retirement plan that allows employees and employers to contribute to traditional IRAs set up specifically for employees. Basically, it’s a simple (no pun intended) alternative for smaller businesses and start-ups that don’t offer other retirement plan options or contribution matching via a 401(k).
However, this doesn’t let employers off the hook in terms of matching your contribution! As the IRS states, employers still have an obligation to match a small percentage of contributions. Your employer has to offer a matching contribution of:
What’s cool about the decision for a company to choose the nonelective contribution option is that you, as the employee, don’t have to contribute to receive the cash.
Basically, if your employer chooses a 2% nonelective contribution then they have to contribute to the SIMPLE IRA account for every eligible employee no matter what. This means that if you earn $40,000 a year and decide not to contribute, your employer is still obligated to contribute that 2%, which is $800 a year.
What about if you’re a business owner? They’re super simple for business owners as well. The filing requirements are way easier, distributions are easier, and if you’ve opted into a Wealth Stack SIMPLE IRA, you’ll find that our platform provides you and your employees with premium financial education, video courses, and access to a whole host of resources you don’t get when you have a 401(k).
First and foremost, the biggest reason why a Wealth Stack SIMPLE IRA is better than a 401(k) is because, when you sign up via our platform, you get access to our exclusive app. Within the app, you’ll find everything you and your employees need to successfully invest in yourselves.
This includes over 100+ hours of financial education videos about topics ranging from basic budgeting tips to suggestions on which stocks to invest in to make your account grow. Outside of our proprietary course material, you’ll also find sections of the app where your employees can engage with professional speakers about specific financial topics and learn more about the stocks they’re investing in.
Similar to a traditional IRA account, employee contributions to a SIMPLE IRA are made on a pre-tax basis, which lowers taxable income. The invested money grows tax-free until you withdraw it, at which time the distributions will be taxed as ordinary income.
Why’s this a perk? Who doesn’t want to lower their taxable income each year? Let’s say you invest the maximum of $14,000 in a SIMPLE IRA account in 2022. That means that if your taxable income was previously $80,000, it would now only be $66,000, which not only reduces your taxable income but now puts you in a different tax bracket. That’s good news for you.
We repeat: There are NO FILING REQUIREMENTS for employers. Yes, we’re talking to you, small business owners. Outside of our host of financial videos and other premium features, the fact that SIMPLE IRAs don’t have annual filing requirements is what makes them way better options for owners like you versus 401(k)s.
What do you have to do, then? Well, the first step is to register here. Once we know what option you’re interested in, we’ll get in touch with more details and information that we need from you about your employees. Wealth Stack will then receive and invest contributions, and give the employer a summary description of the plan features each year.
You do have to actually sign the 5305 IRS form. This document is the plan’s basic legal document, describing your employees’ rights and benefits. However, the IRS doesn’t require you to submit this form.
If you’re a small business owner setting up a SIMPLE IRA plan, you’re required to notify your employees of what’s going on. Why? You have to give them the opportunity to make a salary deferral election. And, you’re required to let them know which decision you made in terms of whether to make matching or fixed contributions.
If you’re already shaking your head thinking, “That just sounds like more work for me,” then wait a second. With Wealth Stack, we take care of that for you! You just have to give us some basic information, sign a form or two, and then we’ll handle the rest.
As mentioned above, there are no annual filing requirements for a SIMPLE IRA plan. This is incredibly helpful for small business owners who don’t have the time or money to invest in a large team to manage these accounts (remember, Wealth Stack is easy and affordable with plans starting as low as $49/month + $7 per employee).
Not only does the IRS make these retirement accounts accessible for small business owners, but they’re actually designed specifically for you. To enroll in a SIMPLE IRA plan and offer them to your employees, you can only have 100 employees or less. This means that they’re designed with you and your needs in mind.
The contribution limits for SIMPLE IRAs vs. 401(k)s are probably the biggest difference between the two for most individuals looking to contribute to an account (so, not the employers in this case, but the employees themselves).
The 2022 contribution limits for a 401(k) account are $20,500 for those under 50 years old. For those under 50 contributing to a SIMPLE IRA, the limit in 2021 is $14,000. However, there is no limit on employer matching contributions. So, if an employer opts for 2% contribution based on compensation, employer matching is allowed on up to $285,000 of the employee’s salary.
While you might not think that, as the employer, this makes much of a difference or benefits you, it does! It allows you to invest back into your employees and their financial futures. Studies show that this, in turn, increases employee engagement, productivity, and retention.
As an individual, you have less control over what you can invest in when contributing to an employer-backed 401(k) account. Your employer and plan administrator will handle most of that. With a SIMPLE IRA, though, you can choose to invest in any of the assets of the financial institution where the account is held.
We’ve just thrown a lot of information at you and know that it’s probably hard to digest it all. Don’t worry; we’re here to help you make sense of it all. Andas we’ve mentioned, we offer packages that include the management of it all, too.
The Wealth Stack Growth Pack offers you the ability to have SIMPLE IRA plans for all of your employees on top of the following digital advisory services:
Learn more about the Wealth Stack Growth Pack here.