small business 401K vs IRA

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liuruyu
Posts: 32
Joined: Thu Jul 26, 2012 1:20 pm

small business 401K vs IRA

Post by liuruyu »

To follow up with my previous post, if my husband and his business partner start hiring F/T employee later, I would assume solo 401K would no longer be a viable option. Now for a business with only total 4-5 people. What's the best retirement option plan? A small business 401K or a SEP IRA? What's their major difference? pros and cons? limitations? And can I roll my husband's solo 401K into those vehicles later?

thx!!
SteveKL
Posts: 500
Joined: Mon Sep 03, 2012 8:13 pm

Re: small business 401K vs IRA

Post by SteveKL »

The contribution limits of your husband's solo 401 will be much better than just about any other tax-advantaged option he has. This could be construed as an excellent reason to "stay small" and not hire any employees. The company could certainly adapt a conventional 401 but the administration fees are much higher than solo, and there are HCE (highly-compensated employee) tests that would limit the amount your H and his partner could contribute to their accounts, based on the amount contributed by employees.

A better plan for a company this size, with owners who want to contribute the max and employees who may or may not want to contribute at all is a Simple-IRA. The overall contribution limits are lower than for a 401, but there are no HCE tests so the plan is not penalized if eligible employees choose not to participate.
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