If you’re trying to decide between a SIMPLE IRA vs 401k, there are a few things you need to watch out for — namely, what the contribution limits are, which plan offers more flexibility, etc.
To save you the trouble, we’ll break down the key features between these two retirement vehicles, so you can decide which is best for your individual needs.
Let’s get to it!
What Is a 401k Plan
A 401k plan is a retirement savings account sponsored by your employer. What’s more, it provides you with the option to have a portion of your paycheck automatically deposited into your account.
In general, there are two types of 401k plans — traditional and Roth.
The traditional 401k is taxed as income when you withdraw money, whereas the Roth 401k is not. In other words, with a traditional 401k, you’ll pay taxes on your contributions and any growth when you retire and start withdrawing the money.
With a Roth 401k, however, you’ll pay taxes on your contributions upfront. Meaning all future withdrawals are tax-free.
What Is a SIMPLE IRA
What is the advantage of a SIMPLE IRA? Similarly to the 401k plan, with a Savings Incentive Match Plan IRA, you can have a portion of your paycheck automatically deposited into your account.
The money in your SIMPLE IRA can then be invested in a variety of ways, depending on the options offered by your particular plan.
The SIMPLE IRA was created with the small business owner in mind — judging how it’s available to businesses with 100 or fewer employees.
And as an employer, you can make two types of contributions: a non-elective contribution of 2% or a matching contribution of 3% of your employee’s salary.
SIMPLE IRA vs 401k for Small Business: the Key Differences
The Savings Incentive Match Plan IRA and 401k are both retirement savings plans that offer tax benefits to small businesses, each with its unique features and benefits — hence why it’s so important to fully understand the disparities between the two to pick the right one for your business.
To make it easier for you, we outlined the main differences between a SIMPLE IRA and a 401k plan, just like we did for SEP IRA and Solo 401k.
SIMPLE IRA Is Easier to Set Up and Maintain
A SIMPLE IRA is much easier to set up and maintain than a 401k plan. For one, there is no yearly filing requirement, and there are no complex rules or regulations to comply with.
On the other hand, due to its flexibility, 401k accounts are subject to more rules:
- You need to make sure that new employees are enrolled as soon as they become eligible
- You need to deposit employee contributions into their accounts on time
- You need to make sure the company’s retirement plan doesn’t unfairly benefit high-earners
- You need to fill out an annual report with the IRS.
So, is a SIMPLE IRA better than 401k? In this case, the SIMPLE IRA reigns supreme.
SIMPLE IRA Is Made for Businesses with 100 or Fewer Employees
To be eligible for a SIMPLE IRA, an employer must have fewer than 100 employees. And unlike a 401k, there is no minimum age requirement for employees in order to participate. As a matter of fact, all employees who have earned at least $5,000 in the previous year are eligible to participate.
To be eligible for a 401k, an employer must be a for-profit business, a non-profit organization, or a government entity. In addition to that, there are no size restrictions for employers.
Moreover, employees who are at least 21 years old and have worked for the company for at least one year are eligible to participate in a 401k plan.
401k Has Higher Limits on Employee Elective Deferrals
The SIMPLE IRA has lower contribution limits than the 401k. For 2022, the limit is $14,000 for employees and $3,000 for catch-up contributions for those 50 and over. With a 401k, the contribution limit in 2022 is $20,500 for employees and $6,500 for catch-up contributions.
When it comes to SIMPLE IRA vs 401k contribution limits, 401k is by far the better option.
SIMPLE IRA Requires Employer Contributions
If you have a 401k plan, you can choose whether you want to contribute to your employees or not. With SIMPLE IRAs, this is not possible. In other words, you have to contribute.
Speaking of which, you can choose one of two types of contributions. The first is the matching contribution. For this, the employer matches what the employee contributes, dollar for dollar, up to 3% of the employee’s annual salary.
The second type is the non-elective contribution. This entails that the employer has to contribute 2% of the employee’s yearly salary (up to $305,000 in 2022), whether or not the employee decides to make any contributions themselves.
So, in this 401k vs SIMPLE IRA showdown, 401k is the definite winner.
401k Plans Are More Flexible
Because 401(k)s are more established and better understood, they tend to have more flexible rules than SIMPLE IRAs. For instance, 401k plans allow employees to borrow against their account balances, whereas SIMPLE IRA rules prohibit loans.
Employers also have more leeway when designing their 401k plans, such as whether to allow employees to make after-tax contributions and how much matching contributions to provide.
Customization May Be Limited With a SIMPLE IRA
Employers that want to tailor their retirement savings plan to the specific needs of their business may find more options with a 401k plan.
As an example, some employers use “profit-sharing” contributions to reward employees for helping the company achieve profitability goals. Yet, profit-sharing is not an option with SIMPLE IRAs.
401k vs SIMPLE IRA Pros and Cons
SIMPLE IRA and 401k each have their pros and cons. Here’s a quick rundown:
| SIMPLE IRA Pros | SIMPLE IRA Cons |
| Easy to set up and maintain | No Roth option, no loans |
| No rules on how much you have to contribute, when you have to contribute, or how you invest the money | Mandatory employer contribution |
| No employer contribution deadlines | Lower contribution limits |
| You can tailor a SIMPLE IRA to fit your business needs and budget | You can’t have any other type of retirement plan |
| 401k Pros | 401k Cons |
| Higher contribution limits | More expensive to set up and maintain |
| Roth option available | Strict rules on how much you can contribute and when you have to make contributions |
| Optional employer contribution | Tax implications for withdrawals |
| Available loans | Fewer investment opportunities |
Which One Is Better: Final Decision
So, is one better than the other? Simply put — no. There are both 401k and SIMPLE IRA pros and cons.
If you’re looking for a simple, low-cost retirement savings plan, a SIMPLE IRA might be the way to go. However, if you want to offer your employees matching contributions and maximize their retirement savings potential, a 401k might be the better choice.
401k plans are excellent tools for saving money. They have high contribution limits, and you can change the plan to fit what you need.
SIMPLE IRAs, on the other hand, are fairly straightforward. They have few administrative requirements and low costs, making them ideal for businesses who want to offer their employees a retirement benefit that is easy to use.
To sum up, the decision mostly comes down to your specific situation and goals.
FAQs
Is SIMPLE IRA the same as SIMPLE 401k?
The simple answer is no, as SIMPLE IRA and SIMPLE 401k are two different types of retirement accounts. They both have their own set of rules and regulations. Here are the main differences between the two:
- The SIMPLE IRA is an IRA-based plan. This means that loans aren’t allowed. However, employers can choose to include loans in their SIMPLE 401k plan.
- You can customize your SIMPLE 401k plan. A SIMPLE IRA plan must follow specific IRS rules.
- Employer contributions to SIMPLE 401k are limited; for instance, the limit in 2022 is $305,000. When it comes to SIMPLE IRAs, only non-elective employer contributions are limited.
What’s the difference between SIMPLE IRA vs SEP IRA?
The main difference between a SIMPLE IRA and SEP IRA is who can contribute. In a SIMPLE IRA, both the employer and employees can contribute. With a SEP IRA, only the employer can contribute.
Another key difference is the contribution limit. For 2022, the contribution limit for a SIMPLE IRA is $14,000. The contribution limit for a SEP IRA is much higher at $61,000.
Is a SIMPLE IRA good for retirement?
Yes, a SIMPLE IRA can be suitable for retirement, especially if you have a small business. There are a few reasons for this. First of all, SIMPLE IRAs offer tax breaks that can help you save money on your taxes.
Next, SIMPLE IRAs often have employer matching programs that can help you boost your savings. Finally, SIMPLE IRAs typically have lower fees than other types of investment accounts, which can help you keep more of your money in the long run.
Of course, there are also some drawbacks to consider with a SIMPLE IRA. For instance, you may not be able to access your money until retirement age, and there may be penalties if you withdraw funds early. So, in this SIMPLE IRA vs 401k battle, you might opt for the latter.
