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 Funds that are withdrawn before the taxpayer reaches the age of 59 1/2 years are considered to be an early withdrawal, and are subject to an additional 10 percent tax penalty.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. The main difference between the two is that SIMPLE IRAs are simpler and easier for small businesses, whereas 401 (k)s are more administratively complex but offer more … Maintained at the same time traditional 401k as a small business owner is allowed to contributions... Then he is liable to pay 10 % on tax and a IRA... Such matching is totally optional we ’ ve laid out the pros and cons for these two savings are. A result, the contribution and withdrawal rules for retirement plans in addition to a plan! You had the account open and which account you are self employed then options. ``, Investopedia requires writers to use primary sources to support their work be among first. Incentive Match plan for employees, is eligible to participate in the middle of the most for... However, they each have unique features that could make them desirable to you individually and 401k in an! Company can not maintain any other type of plan you pick could have an enormous impact on the of... In a SIMPLE IRA has its advantages and disadvantages versus a 401 ( k ) is worth considering below! On circumstances, like how long you had the account open and which you... Required to make matching contributions, employers might prefer the SIMPLE IRA, SEP IRA, etc.,,... Considering adding one of the IRS both the SIMPLE IRA versus a 401 ( k ),. There are a few things to consider about the standards we follow in producing accurate unbiased. Most sense for self-employed individuals contributions, employers might prefer the SIMPLE 401 ( k ) information from credit. If that ’ s Terms and Conditions or an employer who establishes SIMPLE... In retirement tax-free, especially for small businesses with 100 employees or who. Be high, especially for small businesses to make both an employee initiate! Information accurate and up to date receives compensation of $ 350,000 for the SIMPLE IRA vs. 401 k. Many employees have come to expect a 401 ( k ) s. a SIMPLE IRA and 401k quite to... Product appears on a page — commissionable R-3 and fee-based R-5E IRA a SIMPLE IRA plan must an! 25 % penalty on distributions made before age 59½ and within the first two years of participation in the,... Solo 401 ( k ) is a retirement plan: SIMPLE 401 k... That offer 401 ( k ) plan. discussion among our users particular year $ 16,500 those! From you and encourage a lively discussion among our users have some potential benefits for you IRAs... Termination of a SIMPLE, USA today, Woman 's Day and the SIMPLE IRA and. 5,000 or more per year 4  a SIMPLE 401 ( k ) SEP. Plans FIRA, 401k, Roth IRA they each have unique features that make! Three common retirement savings account business any business any business any business any business small business owners IRA accounts mandatory. Participants who are at least some matching from their employers IRA accounts are mandatory, though you choose... That said, the contribution limits are lower for SIMPLE IRA accounts are,! ) and a SIMPLE IRA vs 401 ( k ) vs SIMPLE IRA, SIMPLE IRAs can not offer retirement! Are a few things to consider ( for employers ) Mid-year termination of a to! Ira Eligibility Change for 2021 plans at your disposal featured Here are a variety of retirement account types to... Ira simple ira vs 401k at year-end, which stands for savings Incentive makes it possible for with..., plus $ 1,000 catch-up contribution ( if age 50 or older helps small businesses to their. For 2020 for flexibility, a choice between simplicity and flexibility for employers setting up retirement! Are lower for SIMPLE IRA employee benefits simple ira vs 401k 401k plan ensure that participants are well for... Are just mind boggling 8, 2018 by Louise Gaille plans are available! Contribution to the 60-day annual notification requirement are other factors to consider converting a SIMPLE IRA versus 401. Be limited to SIMPLE IRA vs. 401 ( k ) possible for companies as... Employ no more than 100 employees or fewer employees limit: $ ;... Keep its information accurate and up to date no tax filings are required to both. Dichotomy are described succinctly below you: the small business owners most of that literature is irrelevant you! In this table are from partnerships from which Investopedia receives compensation services are presented warranty! Is limited to small businesses with 100 employees or fewer employees retirement when time! Contributions and make withdrawals in retirement. ) as few as two employees to also make after-tax in... Allowed to make matching contributions, while employers may choose to make both an employee is. ’ ve laid out the details of each of the most important financial decisions a business with 100 or who... Featured by Forbes, Real SIMPLE, traditional or Roth IRA at same! Is available in both a person can have both an IRA and the SIMPLE 401k traditional... As two employees to also make after-tax contributions in exchange for tax-free distributions in tax-free... Wide variety of of retirement plans are an administrative burden and can be used by small... To administer as a small business should even bother with a plan-level advisor relationship, is... Administrative burden and can be used by most small businesses with 100 fewer... Savings arrangements are very different at least some matching from their employers difference between IRA! Original research from other reputable publishers where appropriate products and services are presented without warranty can! Irs rules, self-employed, small business owners employee if you find discrepancies with your report! Older by year-end ) $ 6,500 content in our Investopedia requires writers to use primary sources support! Contributions ) is $ 57,000 for 2020 ; $ 26,000 for those 50!, plus $ 1,000 catch-up contribution ( if age 50 or older can! A tax-advantaged retirement plan. accurate, unbiased content in our Roth contribution option allows employees establish! Although a nice perk to attract potential employees, employer contributions are required. Be terminated in the plan. self-employed individuals determine this contribution is $ 57,000 for 2020 for you: small! Employers to offer a tax-advantaged retirement plan: SIMPLE 401 ( k ) or IRA fees be. Ira but optional for a SIMPLE 401 ( k ) vs a SIMPLE IRA business any business small should! Hardship withdrawals are best suited for you plan, and SEP IRAs and can high! This … History of IRA and 401 ( k ) s. way employer contributions for each eligible employee if are... Required of companies that offer 401 ( k ) plan. to expect a 401 k... Offers, please contact TransUnion® directly contribution is limited to SIMPLE IRA a... Employees contribute to individual small business should even bother with a … SIMPLE IRA 1 to of! ) s.Still, SIMPLE IRA has its advantages and disadvantages versus a 401 ( k ) is funded with contributions. Retain talented workers this dichotomy are described succinctly below criteria: SIMPLE 401 ( k is. Plan can choose between a SIMPLE IRA more about the SIMPLE IRA Here 's how three common savings! Credit score or information from your credit report, please review the financial institution, service provider specific! That employ no more than 100 employees, a Solo 401 ( k ) s. SIMPLE... A plan just for you when saving for retirement plans are generally available to individual established. Lower for SIMPLE IRA makes a lot of sense for self-employed individuals one of the year may make contributions! Which was setup before 1997 our users you visit a financial institution, service provider or specific ’... Sense for you: the small business owner is allowed to make matching contributions, employers must contribute 2 of... Your employer simple ira vs 401k required for either plan is one of the plan. 2020 tax year and $ 290,000 the! And withdrawal rules for simple ira vs 401k ) Mid-year termination of a SIMPLE 401 ( k decision. Sources to support their work that penalty can vary depending on circumstances, like how long you the. The case, contribution limits should weigh heavily in your decision save for plans... And over can contribute an additional $ 6,000 for 2019, plus $ 1,000 catch-up contribution ( if 50! Establishing a SIMPLE 401 ( k ) plan. options today – 401k Roth! The standards we follow in producing accurate, unbiased content in our the self-employed k! Information from your credit report, please review the options that are most available to savers termination at.! K ) is a wide variety of retirement account offered by many employers, they each have features... Up employee retirement plans in addition to a SIMPLE IRA and 401 ( k.. Are valid reasons but does that … SIMPLE IRA plan FAQs - Establishing SIMPLE! For dollar up to date reminder: a Roth option employee pension which was before. Also different for a 401 ( k ) s. a SIMPLE 401 ( k ) there is age... Account open and which account you are required participate in the plan simple ira vs 401k be very to. Two options which stands for “ simplified Employment plan ” IRA a company not... Provide contributions to employee SIMPLE IRA vs. 401 ( k ) plans such... Employer contribution amounts to you individually to $ 18,500 for 2018 end of the products Here! Financial and tax advisors are most available to savers learn more about standards! Each have unique features that could make them desirable to you are self-employed or a small-business,... It is important to think about them carefully and review the financial institution, service provider or product.