401k vs SIMPLE

[EngagedToFIRE]

Looking for some guidance and help from the much smarter people than me on this forum!

I own a business and currently have a SIMPLE IRA.  Nobody else has signed up for it so it's just me on it, which is great.  I max it out, which is $12,500/year.  I also dumped the provider ADP was using and moved it over to Vanguard.  The distributions are basically sent to Fidelity as part of the payroll, then Fidelity cuts a monthly check to Vanguard.  Thus avoiding the obnoxious fees.  So right now I'm essentially paying no fees, I believe, other than the minimal Vanguard fees.  It's all just in a target date fund.

I have about 25 years until retirement but will only be working and funding these accounts another 5 - 15 years I believe.

ADP reached out to me, typical salesperson, and I was offered to switch to a 401k.  Again, I'd be the only person on it.  My understanding is that it has a $19k max instead of $12,500 currently.  Which is great.  And I believe (could be wrong) that the 6% matching goes on top of that.  So I'd get a writeoff on the matching and also reduce my tax exposure by $19k.  So over $20k total I could invest annually.  If that makes sense.  The 401k is administered by Vanguard.  However, the admin fees are looking to be about $300/mo.  I'm in the top tax bracket so the tax savings are quite a bit.

I'm just not great at doing the math on these things.  Is it worth paying the $300/mo since I can put more away tax free?  Would it be worth paying the $300/mo for the next 5 - 10 years, then would I be able to dump the program and put the money in to an account without the admin fees?  Or do I just keep the SIMPLE at $12,500 and continue maxing out my Traditional IRA as well?

Any advice would be greatly appreciated.

Thanks!

[BlueHouse]

Why would you limit yourself to 6% match?  It sounds as if you have enough income to make a larger match (up to ~$56K combined employer + employee)

I'll just tell you what I'm doing:

I have a 401K administered through a company that my payroll provider uses. (Paychex for payroll/taxes and Mid-Atlantic Trust Co. for administering the 401K).The 401K costs $240 per YEAR.   I choose up to 60 funds to have available, but since finding MMM, I just use a few Vanguard funds. 

I save $62K in my 401K (my contribution of 18K + 6K catch up + 38K employer match).  Deferring this much income is the only way I'm able to get back on track after decades of wastefulness and stupid choices. If you're in the top tax bracket, then you'll be able to contribute the max amount too. 

My company is formed as an S-Corp (but I'm the only employee) and I pay myself just enough (about $150K) to make sure I can max out the 401K contribution.  The rest, I pay myself through dividends, thus avoiding payroll tax on everything over $150K. 

[EngagedToFIRE]

Why would you limit yourself to 6% match?  It sounds as if you have enough income to make a larger match (up to ~$56K combined employer + employee)

I'll just tell you what I'm doing:

I have a 401K administered through a company that my payroll provider uses. (Paychex for payroll/taxes and Mid-Atlantic Trust Co. for administering the 401K).The 401K costs $240 per YEAR.   I choose up to 60 funds to have available, but since finding MMM, I just use a few Vanguard funds. 

I save $62K in my 401K (my contribution of 18K + 6K catch up + 38K employer match).  Deferring this much income is the only way I'm able to get back on track after decades of wastefulness and stupid choices. If you're in the top tax bracket, then you'll be able to contribute the max amount too. 

My company is formed as an S-Corp (but I'm the only employee) and I pay myself just enough (about $150K) to make sure I can max out the 401K contribution.  The rest, I pay myself through dividends, thus avoiding payroll tax on everything over $150K.

The salesperson told me anything above 6% would involve profit sharing with the other employees.  I have dozens of employees.  I know NOTHING about 401k's so have no idea how all this stuff works.

I pay myself about $45k/year currently and the rest is distributions (about $500k - $700k).  $150k would be a LOT of extra payroll taxes.  Which would then again bring up the tax implications, right?  I didn't realize you could do such a huge employer match, that's definitely interesting - but per the comment from the salesperson, it doesn't appear I can do that.

I should also add that next year a manager at my company wants to be on the plan.  So having a huge employer match would not make any sense in that case.  So I would almost want to keep the employer match as low as possible in this case, right?  It's essentially all out of my bank account since I'm the sole owner.

Because I have 25 years left until retirement, I can't help but think contributing max SIMPLE and Trad IRA (about $19k/year) for the next 10 years is probably fine, right?  It's already pacing to be in the millions when I'm 60.  I'm just wondering if I'm missing something really obvious.  Mega backdoor, big tax savings type stuff.  I could easily put $50k+ in to a 401k, but I wouldn't necessarily want to do that if I can't touch any of it until I'm 60, and that's 25 years away.  I plan to retire way before that.  But if I could take advantage of tax savings now, then convert in my 50's, for example, and pull money out without huge penalties, that could make sense.

I'm just really unfamiliar with all of the strategies in this regard.  Which is why I've done a SIMPLE and just kept it, simple.  But I'm worried I may be missing a huge opportunity.

[bacchi]

If you're taking $500k in distributions each year, you're going to be a millionaire many times over by age 60.

[PDXTabs]

Because I have 25 years left until retirement, I can't help but think contributing max SIMPLE and Trad IRA (about $19k/year) for the next 10 years is probably fine, right?  It's already pacing to be in the millions when I'm 60.  I'm just wondering if I'm missing something really obvious.  Mega backdoor, big tax savings type stuff.  I could easily put $50k+ in to a 401k, but I wouldn't necessarily want to do that if I can't touch any of it until I'm 60, and that's 25 years away.  I plan to retire way before that.  But if I could take advantage of tax savings now, then convert in my 50's, for example, and pull money out without huge penalties, that could make sense.

I'm just really unfamiliar with all of the strategies in this regard.  Which is why I've done a SIMPLE and just kept it, simple.  But I'm worried I may be missing a huge opportunity.

Topic: How to withdraw funds from your IRA and 401k without penalty before age 59.5

Next year the employee contribution limit for a 401k will be $19.5K, then add 6% of your salary, then if you can get it supported in your plan you could mega backdoor the rest. AFAIK your megabackdoor contributions (because they have already been taxed) can be pulled out of a Roth IRA at any time with no penalty, even without a 72T, "seasoning," or reaching 59.5 years of age.

EDITed to add - and you can still do an IRA on top of that.

[EngagedToFIRE]

If you're taking $500k in distributions each year, you're going to be a millionaire many times over by age 60.

I already am...

I'm just looking to see if I can optimize this aspect.  My main concern right now is probably having another employee on the plan, then the higher matching just costs me money.  That and if the extra $7k I'm able to contribute is worth the $3600/year in fees.  My guess is probably not.  So I'm curious if I'm missing anything obvious as this is all fairly new to me.

With my current savings rate, I'm wondering if this is all a moot point.  As again, the current IRA trajectory of $18,500 is putting plenty away for my 60+ retirement, which may not even matter much since I have a high savings rate and am probably not needing the IRA funds for much of anything at that point.  Would doing backdoor conversions even make a lot of sense as I'm still paying the taxes on it anyways?  Or am I better off just using a taxable brokerage account instead of trying to so hard to funnel in to a 401k?   But mostly, the question is - is it worth the extra fees and also having to consider having an employee on it so I can't go bonkers with the match (currently it's just 3% on the SIMPLE).

[PDXTabs]

But mostly, the question is - is it worth the extra fees and also having to consider having an employee on it so I can't go bonkers with the match (currently it's just 3% on the SIMPLE).

Maybe not, but if I was your employee I would be very excited about a 401k with a 6% match. It would make me much more likely to stick around than a SIMPLE with 3%.

[EngagedToFIRE]

But mostly, the question is - is it worth the extra fees and also having to consider having an employee on it so I can't go bonkers with the match (currently it's just 3% on the SIMPLE).

Maybe not, but if I was your employee I would be very excited about a 401k with a 6% match. It would make me much more likely to stick around than a SIMPLE with 3%.

That's not an issue with this employee.  But I know what you are saying.  I think I'm going to just stick with the SIMPLE and continue maxing it out.  It doesn't seem like there is anything obvious I'm missing, the more I read in to it.

[BlueHouse]

The salesperson told me anything above 6% would involve profit sharing with the other employees.  I have dozens of employees.

Oh -- totally different then, so disregard my prior advice. 

Congratulations on your company and on making a boatload of money.  It's not easy to get one started, and to become profitable, much less that successful.  Great work!

And to offer some unsolicited opinions...you're in a position to make a huge difference to all of your dozens of employees.  Since none of them have joined your retirement option, have you considered having someone come in to help guide them in personal finance and retirement planning?  You could probably get this for free from your plan administrator.    I work at a govt facility and the level of excellent advice and savings vehicles they have is fantastic.  When I worked in Industry, the incompetence and purely bad advice was unsettling.   

[EngagedToFIRE]

The salesperson told me anything above 6% would involve profit sharing with the other employees.  I have dozens of employees.

Oh -- totally different then, so disregard my prior advice. 

Congratulations on your company and on making a boatload of money.  It's not easy to get one started, and to become profitable, much less that successful.  Great work!

And to offer some unsolicited opinions...you're in a position to make a huge difference to all of your dozens of employees.  Since none of them have joined your retirement option, have you considered having someone come in to help guide them in personal finance and retirement planning?  You could probably get this for free from your plan administrator.    I work at a govt facility and the level of excellent advice and savings vehicles they have is fantastic.  When I worked in Industry, the incompetence and purely bad advice was unsettling.

Honestly, I'm kind of burnt out on trying to help them. I don't get involved in that aspect anymore or trying to mentor or help them in any way.  Only the manager.  It's pretty low wage type work and the people come and go, call out on a moments notice, and just don't care enough for me to get emotionally involved trying to help them.  And I pay above market wages at that.  I pay, they do labor, I leave it at that.  I did the retirement plan, offered to everyone, nobody signed up.  And now, I'm thankful for it.  I'd rather them not as it will only cost me more money.  It's not my place to give them life and financial advice.  Once you are in a position like mine, it's interesting how quickly the rose colored glasses fade.  A few situations and you quickly get a much more cold feeling towards your relationship with the employees.  I run it like a business and that's it.  Great environment and nice facility, fair pay, and a cold, objective approach to hiring/firing/managing the employees.  Get fucked over a couple of times by trying to be flexible and help people, and you won't make that mistake again (cost me six figures, and I can't get in to the details).  So now we have a well written employee handbook, thanks to overpriced lawyers, and I follow it to the T.  Heck, I don't know half their names at this point.  I don't care anymore.  Manager manages, I bring in the business, and we follow the handbook objectively with no wiggle room.  It's sad, but that's how it is doing business in a litigious society with a work culture where employees don't give a shit about their jobs, no matter how well you treat them.