Employers Can Use This Retirement Perk as a ‘Stepping Stone' to a 401(K), Says Advisor

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  • A SIMPLE IRA is generally easier and less expensive to operate than a 401(k) plan, the IRS said.
  • It's a good alternative for employers who want to offer a retirement plan in today's hot job market.
  • There are trade-offs like lower annual contribution limits.

Small business owners today may feel they're getting pulled in two directions: stuck between wanting to offer a retirement benefit to their workers but feeling unable to afford costs associated with a 401(k) plan.

But entrepreneurs scared by the affordability of maintaining a 401(k) plan can instead consider an alternative workplace retirement plan known as a SIMPLE IRA, said Marguerita Cheng, a certified financial planner based in Gaithersburg, Maryland.

The plans — formally known as a Savings Incentive Match Plan for Employees — don't carry the startup and operating costs of a "conventional" retirement plan, according to the IRS.

Employers are more pressured these days to offer a retirement benefit to stay competitive in a hot labor market, Cheng said. Job openings have been historically high, and turnover has been elevated.

"If you have a younger workforce or you have no [retirement] plan, it's a great way to start offering one," said Cheng, CEO at Blue Ocean Global Wealth and a member of CNBC's Advisor Council.

SIMPLE IRAs are also "a great stepping stone" to a 401(k) in the future, if an employer wants to make their offering more "robust," she said.

Easy to operate, lower contribution limits

SIMPLE IRAs are generally available to any small business with 100 or fewer employees. The business cannot have any other retirement plan.

The plans require an employer contribution — similar to a 401(k) match — each year. The amount depends on a formula elected by the employer but won't exceed 3% of a worker's annual compensation.

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SIMPLE IRAs are "easy and inexpensive to operate," and don't carry certain requirements like the discrimination testing that 401(k) plans generally do, according to the IRS. Employers can also get a tax deduction for their contributions.

In the case of a SIMPLE IRA, employees elect to contribute money — it's not mandatory for them to save. However, the plans carry lower annual contribution limits relative to 401(k) plans: up to $15,500 compared to $22,500, respectively, in 2023.

Each plan allows workers age 50 and older to contribute extra money via "catch-up" contributions (an additional $3,500 in a SIMPLE IRA and another $7,500 in a 401(k) plan).

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