Question

Penelope’s Paint -N-Plumbing, Inc. (3P) has been in business for 33 years. Penelope is retiring and passing the business on to her two children in equal shares to manage and operate according to their skills and experience. The children, Derek and Morgan, decide to adopt a retirement plan for both current and future employees in an attempt to attract and retain talent. They have decided to adopt a SIMPLE IRA, funded by both employee and employer contributions. What are the advantages and disadvantages of offering a SIMPLE IRA over a qualified plan, such as a 401(k) plan?

Answer 1

A SIMPLE IRA is less complex and costly than a 401(k) plan, with both employer and employee contributions. However, it has lower contribution limits and requires employer contributions even if employees don't contribute.

Step-by-step explanation:

The owners of Penelope's Paint -N- Plumbing Inc. (3P), Derek and Morgan, are considering adopting a SIMPLE IRA retirement plan over a qualified plan, like a 401(k). One advantage of the SIMPLE IRA is that it is easier and less costly to administer compared to a 401(k) plan. It also allows for both employer and employee contributions, providing immediate vesting for employees. On the downside, SIMPLE IRAs have lower annual contribution limits than 401(k) plans and do not allow for Roth contributions or loans. Moreover, employers must make contributions even if employees choose not to. The investments in both accounts are tax deferred, and the plans are portable across employers.

Derek and Morgan's decision to opt for a SIMPLE IRA could help attract and retain employees due to the employer contributions, simplicity of plan management, and tax deferment benefits. However, they should also consider the lower contribution limits and mandatory employer contributions when deciding between a SIMPLE IRA and a more complex 401(k) plan.