Kids will outgrow their clothes. Sometimes that happens with retirement plans.
If you have a SIMPLE IRA, it may have fit in the beginning. But if you want to change to a 401(k) plan in 2024, you need to take action by November 2. That’s the date that employers must provide notice to their employees that 2023 will be the last year for the SIMPLE IRA, and that it will be replaced by a 401(k) plan in 2024.
But keep reading because a new tax law which providres for a mid-year replacement is discussed later.
Reasons to Change
A SIMPLE IRA is relatively easy and inexpensive to administer. 401(k) plans, on the other hande, are more complicated and expensive but have features that businesses (and business owners) can take advantage of. 401(k) plans can:
- Provide larger tax-deductible contributions.
- Favor owners and highly compensated employees.
- Require more employment service to be eligible to participate.
- Provide a graded vesting schedule.
- Allow for plan loans.
- Provide better creditor protection.
- Be able to buy tax-deductible life insurance.
As mentioned above, the November 2 deadline has been extended. Starting in 2024, the new SECURE 2.0 tax law allows an employer to replace a SIMPLE IRA mid-year with a safe harbor 401(k) plan. The 401(k)-replacement plan must be effective as of the termination date of the SIMPLE IRA. There are two planning considerations to the new law:
401(k) Deferral Limit. Employees would be restricted to an aggregate elective deferral limit including catch-up contributions during the replacement year. The limit is based on the number of days covered in each plan.
Rollovers/Transfers. The tax rules regarding a rollover or transfer from a SIMPLE to another qualified retirement plan have stayed the same. In general, an employee cannot transfer money tax-free to a 401(k) plan during the 2-year period beginning when the employee first participated in the SIMPLE. The 2-year period begins on the first day on which the employer deposits contributions in the employee’s SIMPLE.
The Right Answer
There isn’t one. Just like the visual metaphor used for this blog post, it’s whatever fits best.