A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees. The following is an example of how this could affect the contributions that employees receive., ABC Company established a SIMPLE for its employees and has elected to make a matching contribution to the plan for the 2020 calendar year. 401k plans Employee contribution limit: $13,500; $16,500 for those age 50 or older. To help decide which plan is best, answer the following questions: For many small-business owners, the answer is that they’re trying to maximize their own retirement savings dollars. Like SIMPLE IRAs, SIMPLE 401 (k) plans are only available for employers with 100 or fewer employees. For flexibility, a 401(k) plan provides a wider array of choices, including a Roth option. Her work has been featured by Forbes, Real Simple, USA Today, Woman's Day and The Associated Press. All financial products, shopping products and services are presented without warranty. But employer contributions can be treated differently under the two plan types. Internal Revenue Service (IRS). Small businesses have 3 basic retirement plan options today – 401k, SIMPLE IRAs, and SEP IRAs. That said, the IRS allows participants to save in both a SIMPLE IRA and a Roth IRA at the same time. 1. While many employers offer generous matching with their 401(k) plans, such matching is totally optional. This easy-to-administer plan is funded solely with employer contributions and is similar to a traditional IRA account. Disclaimer: NerdWallet strives to keep its information accurate and up to date. For employees who need to tap into their retirement assets when they are ineligible to receive distributions from the plan, loans can be an attractive plan feature. Unlike the SIMPLE IRA, which is limited to small businesses, public and private companies of any size can set up a 401(k). 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. By contrast, participants in SIMPLE IRAs are guaranteed at least some matching from their employers. A SIMPLE IRA plan is similar to a Solo 401k Plan in that it is funded by employee deferrals and additional employer contributions. Employers do not have an annual filing requirement with a SEP-IRA as they do with other retirement plans.#3. For both the SIMPLE IRA and the SIMPLE 401(k) plans, all contributions are immediately 100% vested. Small business employers have a variety of choices if they want to offer a tax-advantaged retirement plan. The offers that appear in this table are from partnerships from which Investopedia receives compensation. But there are other factors to consider as well. A Savings Incentive Match Plan for Employees (SIMPLE) is a tax-deferred retirement savings account. The SIMPLE IRA vs. 401 (k) decision is, at its core, a choice between simplicity and flexibility for employers. This post will help you decide which to use. Internal Revenue Service (IRS). Accessed April 12, 2020. There are also some minimum income limits that employees must meet to qualify for the plan. A subset of the 401 (k) plan is the SIMPLE 401 (k) plan. You also have the freedom to set vesting terms, which allows you to require employees remain employed by you for a set time before taking ownership of your contributions to their accounts. There is no age requirement for the SIMPLE IRA. Employer does need to offer 3% in 3 of the 5 years for the plan. An additional voluntary contribution is a payment to a retirement savings account that exceeds the amount that the employer pays as a match. Stronger oversight : 401(k) plans have more oversight through the plan trustee, administrator, and advisor pertaining to fees, investment selection and employee education. "2021 Limitations Adjusted as Provided in Section 415(d). This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. Requires minimal administrative management. You may also be able to take advantage of certain employer-sponsored retirement programs, such as a SIMPLE IRA or 401(k) plan. (Here’s more on what a SIMPLE IRA is and how to open one.). Employees may make salary-deferral contributions, while employers may choose to make matching contributions to employees who make salary-deferral or non-elective contributions. SIMPLE plans are designed for business with 100 employees or fewer who earn $5,000 or more per year. Dayana Yochim is a former NerdWallet authority on retirement and investing. On the other hand, 401(k) plans allow employees to contribute more to their retirement than a SIMPLE IRA if they choose. There are lower startup costs and operational costs for aa SEP-IRA compared to other retirement plans that would be considered “traditional.”#2. Learn more below about the differences between a SIMPLE vs 401k, and choose 401(k) today, before your chance for this year passes. NerdWallet strives to keep its information accurate and up to date. This may influence which products we write about and where and how the product appears on a page. If that’s the case, contribution limits should weigh heavily in your decision. While the SEP IRA and SIMPLE IRA look a lot like traditional 401 (k) programs, they differ in important respects from that as well as from each other. Internal Revenue Service (IRS). Both plans permit the same type of contributions. Required proportional contributions for each eligible employee if you contribute for yourself. ", Investopedia uses cookies to provide you with a great user experience. The conventional wisdom regarding the Solo 401 (k) vs SEP IRA question is that self-employed people should choose the Solo 401 (k) because … She receives compensation of $350,000 for the year from the company. The reasons behind this dichotomy are described succinctly below. A few primary differences between a SIMPLE IRA and a SIMPLE 401 (k) are that loans and hardship withdrawals are permitted in a SIMPLE 401 (k). The retirement plan not only allows the employer to claim a tax deduction for contributions but also serves as a means of attracting highly competent employees. Participants who are at least age 50 by the end of the year may make catch-up contributions. For example, if you run a business with no employees, a solo 401(k) is worth considering. Borrowing is allowed with a 401(k). SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan, Choosing a Retirement Plan: SIMPLE IRA Plan, Choosing a Retirement Plan: SIMPLE 401(k) Plan, 2021 Limitations Adjusted as Provided in Section 415(d), Income Ranges for Determining IRA Eligibility Change for 2021. Please help us keep our site clean and safe by following our, Prevent identity theft, protect your credit, The difference between term and whole life insurance, How medical conditions affect your life insurance rate, SIMPLE IRA vs. 401(k): The Pros and Cons of Each Plan. Similar to their IRA counterpart, the 2019 contribution limit for SIMPLE 401 (k) plans is $13,000. Accessed April 12, 2020. You with a 401 ( k ) under the two plans will require/allow different employer contribution.... They 're mandatory in a SIMPLE 401K need employers to have less than 100 employees industry experts evaluating,! Is the SIMPLE 401 ( k ) plans is $ 13,000 4  a SIMPLE as! 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