When is the best time to convert a Simple IRA plan to a 401(k)? What are the best practices or required steps to make it easy on your employees while providing additional benefit? Check out this video and let us know if you have any questions!…(read more)

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As an employer, you may be familiar with the Simple IRA plan – a tax-deferred retirement plan designed for small businesses with up to 100 employees. But with a growing business, you may want to upgrade to a more comprehensive plan, such as a 401(k) plan.

Converting from a Simple IRA to a 401(k) plan may seem daunting; however, it can be done with relative ease. In this article, we’ll explore the key points you’ll need to know when considering a Simple IRA to 401(k) conversion.

Understand the Differences

Before switching plans, you should have a clear understanding of the differences between the two retirement plans. While both offer tax-deferred savings and employer contributions, there are some key distinctions.

A Simple IRA allows for a maximum employee contribution of $13,500 per year, with an additional $3,000 for those over 50 years old. Employer contributions can either be a matching contribution up to 3% of employee compensation or a non-elective contribution of 2% of employee compensation.

A 401(k) plan, on the other hand, allows for a maximum employee contribution of $19,500 per year with an additional $6,500 for those over 50 years old. Employers can match a percentage of employee contributions, typically up to 6% or 7% of compensation, and can also offer profit-sharing contributions.

Consider the Costs

When making the switch, you’ll need to consider the costs associated with a 401(k) plan. Fees for investment options, record-keeping, and administrative services can all add up. However, for many employers, the benefits of a 401(k) plan outweigh the costs.

Offer More Flexibility

One of the main benefits of a 401(k) plan is the additional flexibility it offers. A Simple IRA may limit participants to a handful of investment options. A 401(k) plan, on the other hand, allows for greater investment flexibility, including individual stocks, mutual funds, and Exchange-Traded Funds (ETFs).

Additionally, a 401(k) plan can offer a Roth option, which allows for after-tax contributions and tax-free withdrawals in retirement. This can be particularly beneficial for younger employees who expect to be in a higher tax bracket in the future.

Educate Employees

When making the switch, it’s important to educate your employees about the new plan. Many employees may not be familiar with a 401(k) plan, and you may need to dedicate time to explaining the investment options, enrollment process and contribution limits.

Consider Hiring a Professional

For some employers, making the switch to a 401(k) plan may be a daunting task. It may be beneficial to hire a professional to make the transition for you. A financial advisor can help you understand the costs, compare different options and ensure a smooth transition for both you and your employees.

In conclusion, if your small business is growing and your employees are looking for additional retirement savings options, you may want to consider switching from a Simple IRA to a 401(k) plan. While the transition can seem daunting, with careful consideration and proper planning, it can provide your employees with greater investment options and a more comprehensive retirement plan.