Choosing Between SIMPLE IRA and 401k

As a business owner, you’ve likely paid considerable attention to your retirement planning options. After all, many employees ultimately decide on which business they will work for based on the retirement incentives they are offered.

Two of the most common retirement plan options are the SIMPLE IRA (the Savings Incentives Match Plan for Employees Individual Retirement Account) and the 401k. In this article, with additional information provided by Ubiquity, we will compare these two plans head to head so that you can decide which plan will work best for your business and your employees.

Company Size and Growth

401k plans can be implemented for companies that have a single employee as well as for companies that maintain hundreds or thousands of employees. Therefore, whether you run a small or large company, a 401k plan can accommodate your business’s needs.

Conversely, a SIMPLE IRA plan can only be implemented by companies who have 100 or fewer employees. As soon as a business expands to 101 or more workers, the company is no longer eligible for a SIMPLE IRA plan.

Employer Matching

A 401k plan enables employers to choose whether or not they match employee contributions, and in what quantity they will match. This obviously provides significant levels of flexibility for employers so that they can choose to provide compelling incentives to employees.

On the other hand, a SIMPLE IRA imposes matching requirements. Employers are required to either match employee contributions or make nonelective contributions. With regards to employer matching requirements, SIMPLE IRA plans are clearly much more rigid than 401k plans.

Plan Management and Set Up

Admittedly, 401k plans take quite a bit of effort to maintain and set up. There are numerous requirements and 401k plans often have to undergo testing each year to ensure fairness for employees.

SIMPLE IRAs are straightforward and easy to maintain. They require very little adjustment and are inexpensive to initiate and manage.

Taxes

How contributions are taxed is always a big concern for employers and employees.

With a 401k plan, contributions can be made after-tax (Roth option) or pre-tax (traditional option).

SIMPLE IRAs do not allow for a Roth option. All contributions are made pre-tax.

Contribution Maximums

401k plans allow eligible members to contribute $19,500 per year if they are under the age of 50. For those over the age of 50, the contribution limit jumps to $26,000 per year.

SIMPLE IRA plans have much lower contribution maximums than their 401k counterparts. Plan members under the age of 50 can contribute $13,500 per year, while those over 50 can contribute $19,500.

Which is the Right Plan for Your Business?

Looking at the above categories, you may be drawn to the 401k plan. The 401k offers higher contribution limits, the ability to accommodate companies large and small, and flexible tax options.

However, the SIMPLE IRA is easier to maintain, and may be a good option for a small company who has no plan to grow beyond 100 employees.

In the end, the choice is yours. Just make sure you select a plan that will benefit you, your company, and your employees!