Why Consider a SIMPLE IRA with a Roth Option?
When you're running a small business, offering retirement benefits can feel like a balancing act. You want to provide something meaningful for employees, but you also need a plan that's practical to manage and fits your budget.
That's one reason many employers consider a SIMPLE IRA. Designed for small businesses with 100 or fewer employees, a SIMPLE IRA is designed to provide a straightforward way to offer a workplace retirement plan.
As retirement plan features continue to evolve, some SIMPLE IRA plans now allow employees to make Roth contributions. For employers, that raises an important question: Is a Roth SIMPLE IRA feature something worth offering?
Whether a Roth option makes sense for your plan depends on your business and your employees. Understanding how it works is a good place to start.
What is a SIMPLE IRA with a Roth contribution option?
A SIMPLE IRA is a retirement plan designed for small businesses and self-employed individuals. Eligible employees can contribute through payroll deductions, and employers make required contributions as outlined by plan rules.
Employers that offer a SIMPLE IRA with a Roth option give employees another way to save for retirement by allowing contributions on an after-tax basis.
In simple terms, that means the contribution is included in the employee’s taxable income for the year. The contribution and any earnings can then be withdrawn tax-free if the withdrawal meets the requirements for a qualified distribution.
Think of it as adding another feature to your retirement plan. The SIMPLE IRA works much the same way, but employees have one more option when deciding how they want to save and when they'd prefer to pay taxes on those contributions.
How Roth contributions work in a SIMPLE IRA
Employees who choose Roth contributions pay taxes on those contributions before the money goes into their retirement account. Traditional SIMPLE IRA contributions generally work differently, allowing employees to contribute on a pre-tax basis, which may reduce their taxable income for the year.
The key difference is not how much an employee saves, but when taxes are paid.
A Roth option doesn't replace traditional SIMPLE IRA contributions. Instead, it gives eligible employees an additional contribution choice if they decide it's appropriate for their situation.
For employers, offering a Roth feature isn't about steering employees toward one contribution type or another. It's about giving employees more flexibility to choose the approach that best aligns with their own circumstances.
Benefits of offering a Roth contribution option in a SIMPLE IRA
No two employees approach retirement savings the same way. Things like age, income level, career stage, and retirement goals all have a factor in how they plan and save for retirement.
Adding a Roth option won't change the foundation of your SIMPLE IRA plan, but it can give employees more choice in how they save for retirement.
Give employees more flexibility
When it comes to retirement saving, there isn't a one-size-fits-all approach.
Some employees may prefer the potential tax advantages associated with traditional pre-tax contributions. Others may like the idea of paying taxes on their contributions now and meeting the requirements for tax-free withdrawals later in retirement.
By offering both traditional and Roth contribution choices as SIMPLE IRA plan options, you're giving employees additional flexibility to choose the approach that aligns with their personal financial circumstances and long-term goals.
Support a diverse workforce
Your workforce may include employees at very different stages of life.
A recent college graduate, a mid-career professional, and an employee nearing retirement may all think about retirement savings differently. What works well for one employee may not be the right fit for another.
Offering a Roth option can help accommodate those differences by providing employees with an additional way to save within the same retirement plan.
Enhance your benefits offering
Retirement benefits continue to play an important role in attracting and retaining employees.
When employees think about a job opportunity, they're often looking at the full package, not just their paycheck. Offering flexibility within your retirement plan can be one more way to provide meaningful benefits that employees appreciate.
Offer a feature employees may already be familiar with
Many employees have heard of Roth savings through retirement plans offered by previous employers or through personal retirement accounts.
Providing a Roth option within a SIMPLE IRA can help employees access a feature they may already understand and value. It also gives employees more flexibility in how they choose to save.
When a Roth SIMPLE IRA may be worth considering
Not every business will prioritize the same retirement plan features.
As you consider whether a Roth option belongs in your SIMPLE IRA plan, it can help to think about your employees and what you're hoping your benefits package will provide.
Consider questions such as:
Do employees frequently ask for additional retirement savings options?
Would employees appreciate having more than one contribution option available within the plan?
Does your workforce include employees at different stages of their careers and lives?
Do you value offering greater flexibility within your employee benefits program?
There isn't a single right answer. But thinking through these questions can help you have more productive conversations with your retirement plan provider or financial professional as you evaluate your options.
A feature worth exploring
SIMPLE IRAs are designed to provide small businesses with a straightforward way to offer a workplace retirement plan. They allow employees to save through payroll deductions, include required employer contributions, and can be easier to establish and maintain than some other retirement plan types.
Now, employers establishing a new SIMPLE IRA plan through Ascensus can choose to offer Roth contributions as part of their plan. For businesses that like the simplicity of a SIMPLE IRA but also want to offer employees additional contribution choices, it's another feature worth considering.
Every business and workforce is different. Taking time to understand the available options can help you decide which retirement plan features make the most sense for your employees and your business.
More retirement solutions for small businesses
As an industry leader in retirement savings programs, Ascensus works closely with small business employers to simplify plan administration, provide educational resources, and deliver ongoing support.
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