A SEP IRA is simple to administer and no tax filings are required. SIMPLE IRA plans are limited to small businesses that employ no more than 100 employees, although certain other qualifications apply. They're mandatory in a SIMPLE IRA but optional for a 401 (k). A 401 (k) and IRA are both tax-advantaged retirement accounts, but 401 (k)s are offered by employers (who often match employee contributions), whereas IRAs can be … A SIMPLE 401(k) offers optional loans, as well as hardship withdrawals. Fortunately, most of that literature is irrelevant if you have no employees. So which type of retirement plan makes the most sense for you? As an employer you made a decision to offer a Simple IRA retirement plan for your company and employees. Internal Revenue Service (IRS). Unless you are self employed then the options that are most available to you are going to be a 401k and/or an IRA. (Quick reminder: A Roth 401(k) is funded with after-tax contributions in exchange for tax-free distributions in retirement.) Rollover rules are also different for a SIMPLE IRA versus a 401 (k). We want to hear from you and encourage a lively discussion among our users. SIMPLE 401(k): An Overview Small business employers have a variety of choices if they want to offer a tax-advantaged retirement plan. Therefore, if ABC Company had elected to make non-elective contributions, Jane's contribution amount would be the same under both plans. One difference between a SIMPLE IRA and a 401 (k) is the way employer contributions are treated. The kind of plan you pick could have an enormous impact on the finances of everyone involved in your business. No other plan may be maintained at the same time. SIMPLE IRA vs. In contrast, the SIMPLE IRA requires employers to contribute either a fixed 2 percent of all employees’ compensation or match up to 3 p… One of the main differences between the traditional IRA and 401k is that IRA or the Individual Retirement Arrangement is planned by the employee, whereas, 401k is planned by the employer. Funds that are withdrawn before the taxpayer reaches the age of 59 1/2 years are considered to be an early withdrawal, and are subject to an additional 10 percent tax penalty. (Here’s more on what a SIMPLE IRA is and how to open one.). A SIMPLE IRA plan is similar to a Solo 401k Plan in that it is funded by employee deferrals and additional employer contributions. Regain Control Of Your Calendar. This may influence which products we write about and where and how the product appears on a page. Simple IRA VS 401K. Much of the IRS literature comparing these three options is rather complicated. 401(k) or SIMPLE IRA? In 1978, the United States Congress amended the Internal Revenue Code to add section 401(k).Work on developing the first plans began in 1979. Accessed April 12, 2020. Contribution Limits and Employer Match. Internal Revenue Service (IRS). Accessed April 12, 2020. For example, instead of a traditional 401(k) plan, a small business owner can opt for a SIMPLE 401(k). SIMPLE IRAs vs 401(k)s. A SIMPLE IRA has its advantages and disadvantages versus a 401(k). Both the simple 401k and traditional 401k have some potential benefits for you when saving for retirement. Requires minimal administrative management. The amount Jane receives as an employer contribution is determined by the type of SIMPLE that ABC adopted: As stated earlier, the non-elective contribution is subject to the same compensation cap for both plans. ", Investopedia requires writers to use primary sources to support their work. SIMPLE IRAs are the most common, and are great as a starter plan for small businesses. Here are the need-to-know differences between SIMPLE IRAs and 401(k)s: Startup costs and ease of setup often dictate the choice between retirement savings plans. Employers who choose to offer SIMPLE IRAs are generally required to match, dollar for dollar, anywhere from 1%–3% of the … Participants who are at least age 50 by the end of the year may make catch-up contributions. They're mandatory in a SIMPLE IRA but optional for a 401(k). Employer cannot maintain any other type of retirement plan. Employer contributions deductible on business tax return. The account is subject to many of the same rules as a traditional IRA: Contributions reduce your taxable income for the year, but distributions in retirement are taxed as ordinary income. Traditional 401k accounts can be very costly to administer as a small business. 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