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Taxation IRAs 401Ks and the IRS Essay

Pages:4 (1106 words)

Sources:1

Subject:Government

Topic:Tax

Document Type:Essay

Document:#25862710


Simple IRA and Qualified Plans

1. A simple IRA has both advantages and disadvantages when compared to a qualified plan like a 401K. Both are tax-deferred savings accounts, but where the differences lay could matter for a company like 3P. These two types of plan are mutually exclusive – an employer cannot have both at the same time (Appleby, 2019).

However, with a simple 401K the employer could have another plan for employees who aren’t covered by the 401K, which would typically be employees who earn less than $5000 per year. This may not apply to very many people, but could theoretically be one of the differences between the two types of retirement plan. Employees under 21 or who have worked for less than a year may or may not be covered, but there is no age requirement for a simple IRA. If the company has a lot of younger workers, then it might want to opt for the simple IRA over the simple 401K, whereas for other companies there might not be much difference at all.

For either of these plans, the employer cannot have more than 100 employees, as both types of simple plan are built for small business that might struggle with the more complex regular 401K plan. But one of the biggest differences is whether loans are allowed. In a simple 401K, loans are allowed and in a simple IRA they are not. The merits of an employee being able to borrow from their retirement assets can be debated, but the 401K provides that option for employees. One of the biggest issues that an employee might face is a major health care bill, so in part the employer’s health care coverage, if any, might prove to be a contributing factor in this decision.

There are also differences in employer contributions. In a simple 401K, employer contributions are capped at $285,000, but only non-elective employer contributions to simple IRAs are subject to the compensation cap. If elective contributions are not subject to a cap, that probably benefits the highly compensated employees, which could of course include Paula and Prescott.

All told, these two plans are fairly similar for most people, but the differences can affect those at the high and low ends of the income spectrum. Younger workers will appreciate the lack of age limits on the simple IRA, and the owners/executives might as well. However, if Paula and Prescott do not believe they will want to make contributions above the limit, and may not have many workers under the age of 21, then the simple 401K might make more sense because it would allow them to offer a plan that has the ability to take loans, something that might appeal to employees who are looking to buy homes or who have sudden high medical bills and need to avail themselves of that option.

2. Workers who contribute to an employer-sponsored retirement savings plan can still contribute to their own plan…


Sample Source(s) Used

References

Appleby, D. (2019) Simple IRA vs Simple 401K: What’s the difference? Investopedia. Retrieved April 2, 2020 from https://www.investopedia.com/articles/retirement/04/060904.asp

IRS.gov (2020) Retirement topics – IRA contribution limits. Internal Revenue Service. Retrieved April 2, 2020 from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

IRS.gov (2020) Contribution and deduction limits. Internal Revenue Service. Retrieved April 2, 2020 from https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

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