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Small business Simple IRA vs 401k
Posted on 11/18/19 at 9:16 pm
Posted on 11/18/19 at 9:16 pm
My work offers a simple IRA through a large life insurance company (gonna leave it at that)And the funds seem pretty blah with high expense ratios. For myself, my income is increasing which will put my household over the Roth IRA limit. From what I’ve gathered, there’s no ability to backdoor if I have a simple IRA. I do plan on speaking to an accountant or financial advisor for a one time fee if needed.
So I have a couple questions—> what if any, would be the reason for an employer to choose to offer simple over 401k? I seen that Charles Schwab looks to offer little to no fees for the employer.
I plan to mention this to my boss as we are on a personal level and I don’t think he realizes. Also if there’s no change—what would you recommend doing in my scenario?
So I have a couple questions—> what if any, would be the reason for an employer to choose to offer simple over 401k? I seen that Charles Schwab looks to offer little to no fees for the employer.
I plan to mention this to my boss as we are on a personal level and I don’t think he realizes. Also if there’s no change—what would you recommend doing in my scenario?
2
Posted on 11/18/19 at 10:07 pm to SwampBooty
There are multiple reasons for a very small employer to choose a simple compared to a 401k.
The first I would start with is- how much is the employer/owner/owners looking to put away themselves tax deferred? If not much, then there is no reason to put up with the extra headaches/liability of a 401k plan.
401k plans allow for higher contributions, especially when adding employer contributions, compared to the simple**, however they
- have a huge increase in liability for the owner/trustees
- have a significant increase in the oversight from the IRS and DOL
- have an increased administrative burden, including usually hiring and outside party for preparation of testing and form filing.
- I don't know offhand what Schwab is offering for "free" but its probably not entirely free. They start-up may be free, or potentially the administrative (testing, form prep) may be free to the employer, but you're fund fees will be paying for it.
** in some circumstances, due to testing, the owner may not even be able to contribute as much to a 401k plan as they could to a simple.
The first I would start with is- how much is the employer/owner/owners looking to put away themselves tax deferred? If not much, then there is no reason to put up with the extra headaches/liability of a 401k plan.
401k plans allow for higher contributions, especially when adding employer contributions, compared to the simple**, however they
- have a huge increase in liability for the owner/trustees
- have a significant increase in the oversight from the IRS and DOL
- have an increased administrative burden, including usually hiring and outside party for preparation of testing and form filing.
- I don't know offhand what Schwab is offering for "free" but its probably not entirely free. They start-up may be free, or potentially the administrative (testing, form prep) may be free to the employer, but you're fund fees will be paying for it.
** in some circumstances, due to testing, the owner may not even be able to contribute as much to a 401k plan as they could to a simple.
Posted on 11/18/19 at 10:11 pm to SwampBooty
The SIMPLE IRA is basically free (outside of the match assuming someone contributes) to the employer. It's very easy to implement. You're not technically prohibited from doing the back door roth, you would become subject to pro-rata rules. But, as another poster discovered the other day, the solution was to add to his wife's 401k... so give more info and it may help.
The 401k - definitely not free. Even the cheap options usually run in the couple thousand + some type of asset based fee. In addition, there is a shite load of testing that, well, sucks. The owners typically want to max it out, whereas the regular employees typically, on average, don't even contribute which make them fail the tests - thank the gubment for this. Therefore the owners get taxable (typically) checks back next year when the testing is complete which is a double kick in the teeth. There are ways around this testing (safe harbor) but they are required to match 4% and lose any chance at having a vesting schedule and their risk - read: financial outlay - has the potential to shoot up. Basically, they have to jump over a lot of hurdles to make it work for them which is typically the reason they want a plan in the first place.
The good news is, if you have a good relationship with the owner, you can ask him/her if you can use a different custodian - Schwab, TD, Fidelity, etc. - it's your account, not the company's, so you can technically send it wherever you want. Most of the time I recommend against this because as a new employee its rarely good to come across as a pushy a-hole.
You should search this topic on here, the one mentioned above was pretty recent and a very similar situation. It's been discussed numerous times and I have given several much less drunk responses. Hope this helps!
The 401k - definitely not free. Even the cheap options usually run in the couple thousand + some type of asset based fee. In addition, there is a shite load of testing that, well, sucks. The owners typically want to max it out, whereas the regular employees typically, on average, don't even contribute which make them fail the tests - thank the gubment for this. Therefore the owners get taxable (typically) checks back next year when the testing is complete which is a double kick in the teeth. There are ways around this testing (safe harbor) but they are required to match 4% and lose any chance at having a vesting schedule and their risk - read: financial outlay - has the potential to shoot up. Basically, they have to jump over a lot of hurdles to make it work for them which is typically the reason they want a plan in the first place.
The good news is, if you have a good relationship with the owner, you can ask him/her if you can use a different custodian - Schwab, TD, Fidelity, etc. - it's your account, not the company's, so you can technically send it wherever you want. Most of the time I recommend against this because as a new employee its rarely good to come across as a pushy a-hole.
You should search this topic on here, the one mentioned above was pretty recent and a very similar situation. It's been discussed numerous times and I have given several much less drunk responses. Hope this helps!
Posted on 11/18/19 at 10:13 pm to Tigerstark
What you said.
Posted on 11/19/19 at 7:09 am to UpstairsComputer
Thank you very much for your response. I'm not technically new to the company, been here 4 years and basically 3rd in line. My wife has a 403b through her employer which we are basically just doing the match on until student loans are finished.
As I expected, it seems like much more of a headache than I thought. As far as using a different custodian--> you're saying that I could use Schwab/TD/Fidelity for a 401k even if nobody else in the company was enrolled in such plan?
Sorry for my ignorance,
Thank you
As I expected, it seems like much more of a headache than I thought. As far as using a different custodian--> you're saying that I could use Schwab/TD/Fidelity for a 401k even if nobody else in the company was enrolled in such plan?
Sorry for my ignorance,
Thank you
Posted on 11/19/19 at 7:49 am to SwampBooty
You can use a different custodian for the Simple plan. You don't have to use the expensive insurance company. That would, for lack of a better word, be the "preferred" vendor.
My line of thought was possibly correct with that 403b out there... If there is a Roth option, you may still be able to get the money in the Roth (same dollars just from paycheck B instead of account A) and then roll the SIMPLE into the 401k in two years - once you're through the penalty period - assuming you can convince them to start a 401k in that time period. It's not as easy as it seems online, I guarantee.
Here is the thread I was referencing, read this: SIMPLE IRA/Back Door Roth
My line of thought was possibly correct with that 403b out there... If there is a Roth option, you may still be able to get the money in the Roth (same dollars just from paycheck B instead of account A) and then roll the SIMPLE into the 401k in two years - once you're through the penalty period - assuming you can convince them to start a 401k in that time period. It's not as easy as it seems online, I guarantee.
Here is the thread I was referencing, read this: SIMPLE IRA/Back Door Roth
Posted on 11/19/19 at 10:06 am to UpstairsComputer
quote:
You can use a different custodian for the Simple plan. You don't have to use the expensive insurance company. That would, for lack of a better word, be the "preferred" vendor.
Maybe, maybe not. There is a certain coding to the simple Ira and I can’t remember exactly what it’s called. One code makes sure all accounts are held with a certain custodian, the other would allow employees to choose their own custodian.
Being that this is with an insurance company I’d be willing to be his option is the former. Usually large brokerage companies only allow employees to have their plan with whatever custodian they wish.
Posted on 2/12/20 at 1:38 pm to Shepherd88
Sorry to re-direct this thread and bring it back. The boss decided against the 401k due to added fees and tests brought up by you guys. I believe I can move the Simple IRA to another provider. Will look at Vanguard/Fidelity as I hold a Roth and HSA with them, respectively.
I do need advice though on what my next step should be. The wife and I will more than likely exceed Roth limits in 2020. She does the company match for 403b and I do the same for Simple IRA until we are done with student loans.
After being unable to contribute to a Roth due to the inability to backdoor--> should I be opening an individual taxable account with ETFs/index funds? I was considering this especially if I am not able to move my Simple IRA from the "insurance company". Thanks for the replies. I know we have a long way until retirement, I just don't want to fall behind anymore than I am while also staying tax efficient.
I do need advice though on what my next step should be. The wife and I will more than likely exceed Roth limits in 2020. She does the company match for 403b and I do the same for Simple IRA until we are done with student loans.
After being unable to contribute to a Roth due to the inability to backdoor--> should I be opening an individual taxable account with ETFs/index funds? I was considering this especially if I am not able to move my Simple IRA from the "insurance company". Thanks for the replies. I know we have a long way until retirement, I just don't want to fall behind anymore than I am while also staying tax efficient.
Posted on 2/12/20 at 1:55 pm to SwampBooty
quote:
Will look at Vanguard/Fidelity as I hold a Roth and HSA with them, respectively.
I do need advice though on what my next step should be.
Contact Vanguard. They can walk you through your options for redirecting your SIMPLE IRA investments.
Posted on 2/12/20 at 2:04 pm to SwampBooty
quote:Have you checked to see if her employer offers a Roth 403b, because if after tax contributions are your goal, then that would not only allow you to make them, the limits are higher than an IRA.
My wife has a 403b through her employer which we are basically just doing the match on until student loans are finished.
In addition, if she doesn’t have a Roth option, (the accountants could correct me if I’m wrong,) but it looks like Simple IRA’s are treated similar to other employer-sponsored pre-tax contributions (including your wife’s) that don’t get reported as wages and can lower one’s AGI and more importantly MAGI.
So depending on how close you are to limits, you might be able to get below it if you increase those contributions to your employer-sponsored plans. Again the accountants and/or tax lawyers can correct me if I’m wrong, but if not, that could be something to consider.
This post was edited on 2/12/20 at 2:05 pm
Posted on 2/12/20 at 2:24 pm to buckeye_vol
quote:
In addition, if she doesn’t have a Roth option, (the accountants could correct me if I’m wrong,) but it looks like Simple IRA’s are treated similar to other employer-sponsored pre-tax contributions (including your wife’s) that don’t get reported as wages and can lower one’s AGI and more importantly MAGI.
Ahh I haven't seen that. Hopefully that is the case because that could definitely buy me a few more years of contributing.
I'll have to check on the Roth 403b. Regardless, they do one time enrollment in November or around there so I doubt that we can make a change until then.
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