Should I Do a 401(k) or Simple IRA?

Summary

Ramsey Everyday Millionaires: Should I Do a 401(k) or Simple IRA?

Release Date: December 11, 2024
Hosts: Dave Ramsey, Ken Coleman, Rachel Cruze, George Kamel, Jade Warshaw, Dr. John Delony
Podcast Description: Explore how ordinary people have built extraordinary wealth and learn strategies to live below your means, avoid debt, invest wisely, and practice disciplined financial management.

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Introduction

In this episode of Ramsey Everyday Millionaires, listeners delve into the critical decision of choosing between a 401(k) and a Simple IRA for small business owners. The discussion is centered around Stephanie, a small business owner seeking guidance on the best retirement plan for her growing pest and wildlife control company.

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Stephanie’s Business Background

Stephanie introduces her business to the hosts, highlighting its rapid growth and structure:

• Business: Pest and Wildlife Control
• Established: 2016
• Team Size: 17 members, including herself and her husband
• Revenue Distribution: 80% from wildlife control and 20% from pest control
• Growth: Achieved 150% growth in the current year

Timestamp [00:57]
Stephanie: "I have a team of seven that includes my husband and I... This year we've experienced about 150% growth."

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The Core Question: 401(k) vs. Simple IRA

Stephanie reaches out seeking advice on implementing a retirement plan for her business. Her primary concern revolves around understanding the pros and cons of choosing a 401(k) over a Simple IRA.

Timestamp [00:32]
Stephanie: "I own a business and I'm trying to implement a 401k or a simple IRA plan. And I'm wanting to know the best things to look at, what to look for, what are the pros and cons?"

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Insights from Jade Warshaw

Jade Warshaw advises Stephanie to consider various factors before making a decision:

• Max Contributions: Evaluate the maximum contributions for each plan.
• Employer Matching: Assess how much the business can match versus the employee contributions.
• Tax Implications: Understand the tax benefits of each option.
• Fees: Compare the costs associated with administering each plan.

Timestamp [01:17]
Jade Warshaw: "It all depends on how much, like what the max contributions are, how much the business is going to match that versus... it's better for the money to go to your team members."

She emphasizes the importance of consulting with a tax professional or a financial advisor to analyze the specific financial situation of the business.

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Ken Coleman’s Practical Advice

Ken Coleman builds on Jade's insights by stressing the need for personalized consultation:

• Consult a Tax Professional: Engage with a tax expert who specializes in small businesses.
• Peer Consultation: Talk to other small business owners with similar profiles to gain practical insights.
• Simplify the Decision-Making Process: Create a straightforward comparison between the two plans focusing on benefits for both the business and its employees.

Timestamp [02:05]
Ken Coleman: "Go talk to a few [tax professionals]. They want to specialize obviously in small businesses and how they help with some of this stuff."

He also commends Stephanie for her business growth and dedication to her employees, reinforcing the importance of making a choice that benefits both the business and its team.

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Stephanie’s Considerations and Concerns

Stephanie shares her CPA’s recommendation and her reservations:

• Recommendation: Her CPA suggests a Simple IRA to avoid the higher fees associated with a 401(k).
• Concerns with 401(k): Believes that a 401(k) offers more flexibility, such as vesting and optional employer matching, which align better with her business’s values and employee engagement strategies.

Timestamp [03:02]
Stephanie: "She immediately said, you need to go with a simple IRA... I'm viewing a 401 or a simple IRA as a little more limiting than a 401k."

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Balancing Business Needs and Employee Benefits

The hosts discuss the importance of finding a balance that serves both the business’s financial health and the employees' retirement needs. They highlight that while a Simple IRA might present lower fees, a 401(k) could offer greater flexibility and benefits, depending on the specific circumstances of the business.

Timestamp [04:17]
Ken Coleman: "What's good for both."

Timestamp [04:30]
Jade Warshaw: "It'd be better for the money to go to your team members."

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Conclusion and Encouragement

The episode concludes with Dave Ramsey encouraging listeners to visit ramsaysolutions.com/retire for more information on retirement planning. He underscores the importance of making informed decisions to secure both personal and employee financial futures.

Final Remarks [05:10]
Dave Ramsey: "Thanks for tuning in to Ramsey Everyday Millionaires... Ramsey Solutions is a paid non-client promoter of participating pros."

The hosts wrap up by celebrating Stephanie’s entrepreneurial spirit and her commitment to providing for her team, embodying the essence of the American dream through dedicated small business ownership.

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Notable Quotes

• Stephanie:
  "[03:02]" "She immediately said, you need to go with a simple IRA... I'm viewing a 401 or a simple IRA as a little more limiting than a 401k."

• Jade Warshaw:
  "[04:17]" "It'd be better for the money to go to your team members."

• Ken Coleman:
  "[04:30]" "What's good for both."

• Dave Ramsey:
  "[05:10]" "Ramsey Solutions is a paid non-client promoter of participating pros."

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Key Takeaways

• Evaluate Business Growth: Rapidly growing businesses like Stephanie's must carefully consider retirement plans that align with their financial trajectory.
• Consult Professionals: Engaging with tax professionals and financial advisors is crucial in navigating the complexities of retirement plan options.
• Balance Benefits: Strive to choose a retirement plan that benefits both the business and its employees, ensuring sustainable growth and employee satisfaction.
• Understand Fees and Flexibility: Weigh the costs and flexibility each plan offers to determine the best fit for your business model and employee needs.

By addressing these factors, small business owners can make informed decisions that support both their own financial goals and those of their employees, fostering a prosperous and collaborative work environment.

Transcript

[Dave Ramsey]

This episode is sponsored by SmartVestor. Connect with an investing pro for free at Ramsaysolutions.com invest. You're listening to Ramsey Everyday Millionaires, where we talk investing, retirement, building wealth and outrageous generosity.

[Ken Coleman]

Greenville, South Carolina is where we go next. Stephanie is joining us there. Stephanie, how can we help today?

[Stephanie]

Hi. Thank you for having me. Ken and Jade.

[Jade Warne]

You bet.

[Ken Coleman]

What's happening?

[Stephanie]

I am reaching out to ask a question about. I own a business and I'm trying to implement a 401k or a simple IRA plan. And I'm wanting to know the best things to look at, what to look for, what are the pros and cons? Just some direction with this.

[Jade Warne]

Okay. What kind of business is it? And you know, is it just you or do you have employees? Tell me more.

[Stephanie]

I do. I have a team of seven that includes my husband and I. The business was started in 2016. It's for pest and wildlife control. We are mainly as far as income is concerned. Wildlife is about 80% of our income and pest is about 20%. We added that on about two years ago. But yes, seven, 17 members total.

[Jade Warne]

Okay. If I were you, there's a couple of different routes you could go and I don't want to lead you astray. I think that it all depends on how much, like what the max contributions are, how much the business is going to match that versus the what you, what the employer puts in or what the employee puts in. I'm sorry. And so for that reason, I'd probably work with a. I'd work with your bookkeeper or I'd work with a, somebody who's going to be able to give you better tax information than I would. I could tell you kind of on a basis if you're kind of more of a solopreneur, what you might do. But with this, I'd want to, I'd want somebody to really look at the numbers and tell me what's going to work best for me tax wise and investment wise for me and my employees.

[Ken Coleman]

Yeah. I think, Stephanie, neither one of us are great experts on this.

[Jade Warne]

Yeah.

[Ken Coleman]

But I think we can tell you what to do beyond what Jade said. I think again, a tax pro, somebody who works with businesses. So you can get tax pro information@ramsey solutions.com in your area. Go talk to a few. They want to specialize obviously in small businesses and how they help with some of this stuff. They may have some insight into this investment pros as well. And then you know what I would be doing? I would, I would also be talking to small business owners. Do you happen to know of two or three people top of your mind right now that run companies around the same size as yours in your area?

[Stephanie]

I do. I've talked to several people about this. Y'all are actually one of my last phone calls.

[Ken Coleman]

Oh, good.

[Stephanie]

I went down the road to implement a 401k and when I walked into my bookkeeper to just kind of talk to or my CPA who does my bookkeeping as well, she immediately said, you need to go with a simple IRA. Now, this year we've experienced about 150% growth.

[Ken Coleman]

Good for you.

[Jade Warne]

That's awesome.

[Stephanie]

I guess my only concern. Yeah, I mean, it really has been amazing. But making a good decision, I guess maybe I'm viewing a 401 or a simple IRA as a little more limiting than a 401k.

[Ken Coleman]

In what way?

[Stephanie]

So just looking in the way of like a 401k, you get vested. There's matching in both programs. But you have to match with a simple.

[Jade Warne]

That's right.

[Stephanie]

You don't have to. The opt in happens with the 401k. So some of those styles of the plan make more sense to me with the 401k. And that was the road I was going down.

[Jade Warne]

Why did she say simple?

[Stephanie]

She said simple because she said, why are you going to pay the fees of a 401k? Just put the money into your people's plan. That was.

[Jade Warne]

That was the firm word.

[Ken Coleman]

And see, I like.

[Jade Warne]

I like that too.

[Ken Coleman]

I was going to give you a formula to go get answers on this. What's best for the business, what's best for the people that you've hired. And I think that that's your. I always try to take complexity and I simplify it and I go, if I'm looking at all this, I'm going to have a simple piece of paper and I'm going to draw a line down like, okay, which one of these plans is best for this business and which one of these plans is best for the employees? And we want to try to find a solution that is good for both.

[Jade Warne]

Yeah. I mean, if she's the rubric, if she's right, and the math is that what is. Such as whatever you're paying in fees is pretty much comparable to what you'd be paying in a match. Yeah. It'd be better for the money to go to your team members.

[Ken Coleman]

That's what you want to get to. What's good for both.

[Stephanie]

Okay.

[Ken Coleman]

And if we can get best for both, great. But if there's a give and take. We want to, we want to land that way because you got a great heart for your people. I love what you're trying to do. And by the way, I just want to give Stephanie a shout out real quick. This is awesome to talk to a small business owner. This is a female small business owner taking care of the critters.

[Jade Warne]

Yeah. Very, very good.

[Ken Coleman]

Growing 150%. That's awesome. So yay Stephanie. Can we give her some love? I mean that's really awesome. She's providing jobs. This is the American dream. Yeah, that right there. She's a small business owner solving a real problem and so I love that. Good stuff.

[Dave Ramsey]

Thanks for tuning in to Ramsey Everyday Millionaires. To learn more about how to plan for retirement, visit Ramsaysolutions.com retire or click the link in the show notes. Ramsey Solutions is a paid non client promoter of participating pros. Learn [e-mail] SmartVestor.