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SIMPLEs, SEPs, and 401(k)s, Oh My!


Hey, it's Mike Sayre with CUI Wealth Management. Let's talk about three of the most common employer-sponsored retirement plan strategies for small businesses.

The first is a SIMPLE IRA. Just like the name implies, it's super simple to set up, it's simple to run, and it's relatively cheap. It's kind of like the little brother to the 401(k); it's very similar. You can set it up in one of two ways. You can either say, "We're gonna do a match of dollar for dollar up to three percent of what the employee puts in," or you can say, "We're going to make a two percent contribution across the board for anyone eligible for the plan. The cons are that you don't have much flexibility for eligibility. You don't have flexibility in how you set up the match. You can't do any vesting. So those are the areas it falls short. You generally can't contribute as much to SIMPLEs as other options out there.

The second is the SEP IRA. The SEP IRA is just like the SIMPLE IRA, super simple to set up, super easy to administer, usually very cheap. But once again, the limitations are that you don't have any vesting schedule, and you can't set up much in terms of eligibility. There are some limitations on what you can set up for who's eligible, and there's no match. All the contributions are 100 percent from the company. That could be a pro or a con because it might make sense for a company that's trying to reduce some of the tax liability. Once again, the employee cannot put any additional contributions for themselves into the plan. The limit is 25 percent of the income or the lesser of that or the contribution max for that year. It has to be even across the board. So, you would say, "Hey, we're going to contribute 10% of everybody's income to the plan" You can't choose favorites.

The third is 401k. 401ks are the most common retirement plans you see out there. 401Ks are almost synonymous with retirement plans. Some of the pros are that you have much more flexibility in setting it up, as far as the eligibility is concerned. You can have a vesting schedule on it. So, you can say, "Hey, you gotta work for us for long enough to be vested in the contributions we make." You can have much more flexibility in what kind of match you set up or even if you do a match at all. You can set it up as a safe harbor 401k and make it a little easier for the high-income earners and the owners to put a little more of their income into the plan. There are many ways to set it up.

On the other side, with much more flexibility comes some additional administration complexities and costs that go along. There are also additional reporting requirements that you don't have with some of the other retirement plans out there. They can be a little bit more costly, but you can also contribute a lot more in general than other small business retirement plan options.

If you run a small business and you have one of these retirement plans or you're reviewing it. Keep in mind that SIMPLE IRAs, SEP IRAs, and 401ks are some of the most common types of plans you're going to see out there. But you need to talk to your financial professional and make sure that the options you choose meet your company's needs. Once again, Mike Sayre with CUI Wealth Management, your 401k advisor.

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