If you are trying to save for your future retirement, then three popular options which may be available to you are a SARSEP, a SIMPLE IRA, and a 401k Plan.
A SARSEP is a simplified employee pension which was setup before 1997. It includes a salary reduction arrangement which allows the employer to contribute part of their salary to an individual retirement account or annuity.
A SIMPLE IRA (it stands for “Savings Incentive Match Plan for Employees) allows for employers and employees to contribute to a traditional IRA. Many small employers who do not have a retirement plan benefit for their workers will use this option because it allows them to contribute to a traditional IRA setup for a worker. The SEP-IRA, which is associated with the SARSEP retirement option, is one of the SIMPLE IRA variations which are permitted.
A 401k plan is a standard tax-advantaged retirement plan option that is offered to workers employed by for-profit businesses. A portion of the salary can be directed to the retirement plan, which then can be matched by the employer with a certain amount. Some 401k plans allow for immediate vestment of contributions, while others may delay vestment for 12 months or more.
Each option offers distinctive advantages and disadvantages to consider. Here are some of the key points of each retirement plan option to look at.
List of the SARSEP Pros and Cons
#1. There are lower startup costs and operational costs for aa SEP-IRA compared to other retirement plans that would be considered “traditional.”
#2. Employers do not have an annual filing requirement with a SEP-IRA as they do with other retirement plans.
#3. Employers can establish an account for themselves, in addition to the IRAs which are made available to their employees. An employer can contribute a 25% maximum of an employee’s pay to a SEP-IRA.
#4. Only employers are allowed to make contributions to the SEP-IRA and employees are not eligible for this retirement option until they’ve worked at least 3 out of the last 5 years for the company.
#5. Employees are 100% vested immediately with their SEP-IRA funds and this vestment continues indefinitely.
#6. After the age of 50, some employees may be permitted to make contributions to their SEP-IRA for catch-up purposes. Some are even permitted to make non-SEP contributions. It all depends on what the plan documentation allows.
#7. The rules for loans, investments, and distributions which apply to all traditional IRAs also apply to the SARSEP structure, which means loans are not permitted as they would be with some other retirement options.
#8. The contributions which are made by the employer to the SEP-IRA do not count toward the gross income of the employee unless there are excessive contributions made for some reason.
#9. For employers who wish to offer a profit-sharing plan as a benefit, this retirement plan option offers a way to retain quality employees at a cost that is lower than increasing salary offers.
#10. Trades are made within a SEP-IRA without tax consequences, including stock options, which allows you to profit from market conditions that may be volatile.
List of the SIMPLE IRA Pros and Cons
#1. It is a retirement plan that is very easy to maintain. Statements offered at the end of the year are complete and simple to understand.
#2. There are no large brokerage fees that are associated with this retirement option compared to other plans that are available for employees to use.
#3. Employers are able to match a specific percentage of the contributions made by the employee. This provides extra money toward the worker’s retirement while the employer gets a tax deduction from their taxable income for the amount that is contributed.
#4. The option is only available to employers with fewer than 100 employees. There are no exceptions granted for this rule. Bigger companies must provide more of the “traditional” retirement options, such as a 401k or 403b.
#5. Large penalties apply if the money is taken out prematurely. Some employees may be hit with a penalty that is up to 25% of the balance of the account if they withdrawal funds before the age of retirement.
#6. The largest penalties apply to SIMPLE IRAs that are started within 2 years of needing a change. If a worker changes jobs and wants to rollover their IRA to a 401k, they would need to wait until after the 2-year period or they would pay the maximum penalty.
#7. If you are self-employed, you may be eligible for this type of IRA. For the purpose of contributions, people who are self-employed count as both the employer and the employee.
#8. SIMPLE IRAs require more administrative oversight and may not offer online options for making changes to the plan. The entire retirement setup with this option is a series of individual IRA accounts.
#9. It offers a 3% match or a 2% mandatory contribution, both of which are immediately vested when the money is added to the IRA. The actual cost of oversight, however, is virtually nothing with this option, whereas it may be several thousand dollars each year for a 401k plan.
List of the 401k Plan Pros and Cons
#1. There are federal legal protections in place for 401k plans (and other workplace retirement plans), which set minimum standards that must be followed.
#2. Most 401k plans will allow you to rollover what you’ve saved into new plans when you switch jobs. For the few that do not, you have the option to rollover to an IRA that you can self-manage in the future.
#3. Many employers will offer matching contributions to their 401k plan. These matches are usually based on a maximum salary percentage, which is 3% to 5% for most employers. Some do offer a direct dollar-for-dollar match of whatever you save.
#4. There are higher contribution limits permitted with 401k plans than other retirement products. For the 2018 tax season, you’re permitted to contributed $18,500 to the account. You’re permitted catch-up contributions of $6,000 as well if you are over the age of 50.
#5. Many plans offer a feature where you can increase the percentage you contribute to the 401k from your salary each year. If you have this feature, just set it up to increase 1% each year until you reach the maximum.
#6. Some 401k plans offer free consultations with financial advisors, which will allow you to see if your retirement savings is on track for the goals you have.
#7. Many 401k plans offer limited investment options, which means you’re allowed to choose how conservative or how risky you want the investments to be. If you want to invest into items that go beyond stocks, bond, or mutual funds, there may be limited options available to you.
#8. 401k plans tend to be expensive to run, which means there are administrative fees that you’ll pay each year for this retirement plan. One way to keep your costs down is to use index funds or ETFs whenever possible, as these options tend to have lower fees and premiums.
#9. Early withdrawal penalties apply if you access your 401k plan before reaching the age of 59.5 in the United States. Even under many financial emergency situations, a 10% tax penalty may apply to the funds.
#10. Some 401k plans will offer a Roth option to employees, which is something that SARSEP and SIMPLE IRAs are unable to provide. The features of a Roth 401k are similar to that of a Roth IRA, with the benefit that the employee doesn’t need to setup the account on their own.
#11. There are more reporting requirements with a 401k when compared to other plans that are available.
SARSEP vs SIMPLE IRA vs 401k: Which is Better?
It is important to remember that this guide is written for the employer more than the employee. Most employees will not have the option to choose their retirement plan. They’ll get the SARSEP, SIMPLE IRA, or 401k based on what their employer has decided for them.
SARSEP and SIMPLE IRAs are good retirement plan solutions for small employers and workers who have pension options for an IRA. If you employer doesn’t offer a pension option or it was started after 1997, then a 401k plan or other retirement contribution option that is available to you will be a better solution.
401k plans, and their 403b cousins, allow you to take your money with you when you switch employers. If you are not maximizing your contributions that your employer will match, then you’re leaving money on the table. Even a $1,500 match in 3 years is $4,500 you wouldn’t have had otherwise.
As with any retirement savings plan, there are personal pros and cons which must be considered too. Take your situation, compare it to the key points mentioned in this guide, and then work with a financial planner to make sure all of your bases are covered.