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SIMPLE IRA vs. 401k: Which Should You Choose?

When it comes to selecting a retirement plan for your employees, the choices can be overwhelming and hard to navigate. Two of the most popular choices: SIMPLE IRAs (Savings Incentive Match Plan for Employees) and 401K plans each offer multiple benefits and come with certain drawbacks.

In this article, we will compare the SIMPLE IRA and the 401K across a number of categories to enable you to choose the best option for your business.

What are the Contribution Limits of Each Plan?

Annual retirement plan contribution limits are dependent upon the age of the employer or the employee contributing to the fund. For those under the age of 50, the plans offer the following limits:

  • SIMPLE IRA: $13,500.
  • 401K: $19,500.

For those individuals aged 50 and older:

  • SIMPLE IRA: $19,500.
  • 401K: $26,000.

401k plans allow for higher contribution limits than do SIMPLE IRA plans for individuals of any age.

Which Plan is Better for Companies that Plan to Grow?

According to the plan providers at Ubiquity, the SIMPLE IRA is reserved for businesses with a maximum of 100 employees. 401k plans, on the other hand, can accommodate companies with a single employee, or massive enterprises that have many more employees. Therefore, if a business plans to grow larger than 100 employees, the 401k plan is the better option.

Which Plan Provides Better Matching Options?

There are different matching requirements between the SIMPLE IRA and 401k plan options as follows:

  • SIMPLE IRA: Employers are required to match employee contributions with a SIMPLE IRA.
  • 401K: Employers have the option of matching or not matching employee contributions with a 401k retirement plan.

When it comes to flexibility in matching requirements, the 401k plan tends to be the better option for most businesses.

Which Plan Allows for Better Vesting Options?

SIMPLE IRAs require that employees immediately vest. Contrast this with 401k plans, which allow for vesting immediately, on a graded scale, or on a cliff scale.

In this category, we see that 401k plans provide increased flexibility when it comes to vesting options.

Do These Plans Allow Contributors to Take Out Loans?

It goes without saying that a retirement plan should, under ideal circumstances, be left to grow as much as possible. However, people can fall on hard times and may need to turn to their retirement accounts for loans. Unfortunately, with a SIMPLE IRA, loans are not allowed. Alternatively, 401k plans do allow for loan access, if needed.

Hopefully no one ever has to take a loan out from his or her retirement fund. But if times get tough, 401k plans provide this option to contributors.

Which Plan is Easier to Set Up?

Generally, SIMPLE IRAs tend to be easier to set-up and maintain than 401k plans are. Additionally, SIMPLE IRAs are not subject to IRS compliance testing which is necessary with 401k plans.

In this regard, SIMPLE IRAs tend to be the less expensive and complicated option as compared to the 401k.

Which Plan Should I Choose for My Business?

As you can see, there are many benefits and downsides to both options. It is important that you clearly define your company’s needs, consult with professionals, and make an informed decision on which retirement plan will work best for your business.

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