SIMPLE IRA vs. 403b

Submitted by Matthew Ottusch on Wed, 2024-01-31 20:44

What are the considerations for a small charitable organization when considering a retirement plan for its employees (less than 5 employees)?



Submitted by William Tuttle on Thu, 2024-02-01 03:29

  • Administrative costs, employer contribution costs and contribution limits.
  • Administrative costs: There will be signifinat 403b startup and annual administrative costs.
  • A 403b is not subject to non-discrimination testing of employee deferrals. Therefore, they can opt to have no employer matching. The 2024 403b employee deferral limit = $23K. Plus $7,500 catch-up contribution >= age 50.
  • If you would like to offer employer matching and lower administrative costs, Fidelity, Schwab and Vanguard offer SIMPLE IRA plans with no to limited startup and annual administrative costs. Avoid any SIMPLE IRA custodians using advisors and/or from full service brokers with excessive costs and fees. They will be a great detriment to your employees.
  • You must either provide 3% employer matching or 2% non-elective employer contributions. Although, the employer match can be as low as 1% in 2 of 5 years, including the first two*.
  • One drawback is that SIMPLE IRA funds cannot withdrawn or rolled over for the first two years after the first contribution.
  • The 2023 SIMPLE IRA employee deferral limit = $16,000, with a $3,500 catch-up contribution >= age 50. Effective 1/1/24 SECURE Act 2.0 increases both by 10% for plans with <= 25 employees.
  • These are some keys differences. There are more details as always.
  • With 5 employees, I  personally would adopt a SIMPLE IRA from Fidelity, Schwab and Vanguard.

    • *I like the following “training wheels” approach for new Simple IRA plans. 1% match year one, 2% year two and 3% years three – five.

    Submitted by Matthew Ottusch on Thu, 2024-02-01 18:14

    Is the employer match mandatory? If so, how is the required employer match calcuated? What is the total limit for Simple IRA contributions when including both employee and employer contributions?

    Submitted by William Tuttle on Thu, 2024-02-01 20:35

    • As I already stated in the 3rd bullet, 1st sub-bullet. You must make employer contributions. This can be either:
    • an exact 2% (can not normally deviate*) of compensation non-elective employer contribution to all employees up to the compensation limit (2024 = $335K), or;
    • An employer match normally up to 3% (can not normally exceed) of compensation with no compensation limit. With the ability to reduce this to 1% in 2 out of 5 years, including the first 2.
  • There is no direct (employee + employer) total contribution limit. It is solely based on the individual employee and contribution limits.
  • For more detailed information, reference the IRS SIMPLE IRA FAQs https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans

    • *While it would not apply to you. The SECURE ACT 2.0 10% increase in employee deferral and catch-up contribution limits normally only applies to SIMPLE IRA plans with <= 25 employees. However, It can apply to SIMPLE IRA plans with 26 - 100 employees. by increasing the non-elective employer contribution to 3% of compensation or nominal employer match to 4%.

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