Internal Revenue Service (IRS). A traditional 401(k) plan is a qualified retirement plan offered by an employer to the employees. To help choose the right plan for your business, you need to understand their features and match them to your priorities (e.g., higher contributions or simpler administration). On the other hand, an employer may include loans as a feature in a SIMPLE 401(k) plan. The aptly named SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is the more straightforward of the two options. "Income Ranges for Determining IRA Eligibility Change for 2021. "SIMPLE IRA Plan FAQs - Participation." Savings Incentive makes it possible for companies with as few as two employees to establish a 401(k) or IRA. SIMPLE plans are designed for business with 100 employees or fewer who earn $5,000 or more per year. Traditional and Roth Individual retirement accounts (IRA) are available to almost all taxpayers who have earned income, providing tax-deferred retirement options. She receives compensation of $350,000 for the year from the company. Like SIMPLE IRAs, SIMPLE 401 (k) plans are only available for employers with 100 or fewer employees. Employer contributions deductible up to IRS limits. Employer contributions to employee SIMPLE IRA accounts are mandatory, though you can choose between two matching arrangements dictated by the IRS. For the SIMPLE IRA, an employer who elects to make matching contributions may choose to reduce the amount to one that is less than 3% but no less than 1% for two out of every five years. A SIMPLE IRA is only available to small businesses with 100 or fewer employees. Employee contribution limit: $19,500; $26,000 for those age 50 or older. 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. A SIMPLE IRA is another type of investment plan that allows small businesses to help their employees save for retirement. All financial products, shopping products and services are presented without warranty. 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). 4 A SIMPLE IRA works like a cross between traditional IRAs and 401 (k) plans. If that’s the case, contribution limits should weigh heavily in your decision. The drawbacks: Like the SIMPLE IRA, a SEP requires employers to contribute to eligible employee accounts, and no Roth version is allowed. For a 401(k), call our workplace team at 866-418-5173. Because the SIMPLE IRA is an IRA-based plan, loans are not allowed. A Savings Incentive Match Plan for Employees (SIMPLE) is a tax-deferred retirement savings account. 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. Accessed April 12, 2020. Pre-qualified offers are not binding. Read more. Internal Revenue Service (IRS). Additionally, employers are allowed only to maintain Simple 401K. Internal Revenue Service (IRS). Simple IRA vs 401(k) vs Solo 401(k) vs SEP IRA For the matching contributions, employers must contribute dollar for dollar up to 3 percent of the employee's compensation. Both the Simple IRA and SIMPLE 401K need employers to have less than 100 employees who have received at least $5,000 in compensation. For flexibility, a 401(k) plan provides a wider array of choices, including a Roth option. For all small-business plans, call us at 800-544-5373. Mandatory employer contribution: Either matching contribution of up to 3% of employee's pay or contribution equal to 2% of employee’s compensation, even if employee does not contribute. Simple IRA vs. 401(k) There is a wide variety of of retirement account types available to savers. These include white papers, government data, original reporting, and interviews with industry experts. Disclaimer: NerdWallet strives to keep its information accurate and up to date. The SIMPLE IRA vs. 401(k) decision is, at its core, a choice between simplicity and flexibility for employers. For both the SIMPLE IRA and the SIMPLE 401(k) plans, all contributions are immediately 100% vested. With a 401(k), employers are not required to make contributions, although many employers elect to make some type of matching contribution for participating employees. Another big difference is that you can opt for a Roth version of the plan, whereas the SIMPLE IRA allows no Roth provision. Or an employer could choose between a SIMPLE 401(k) and a SIMPLE IRA. Employer matching with a 401(k) is flexible as long as the plan is not discriminatory. 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. Traditional 401(k) Plans. 1. Choosing a retirement plan is one of the most important financial decisions a business owner will make for their business. In addition to the standard traditional IRA/Roth IRA options that everybody has, you have three more noteworthy options: Simplified Employee Pension (SEP IRA), Savings Incentive Match Plan for Employees (SIMPLE IRA), and; Individual 401(k) — sometimes called … SIMPLE IRAs contributions work differently than SEP IRAs and 401 (k)s. An employer can either match up to 3% of an employee's annual contribution or set … It's a cheaper (and easier) plan for an employer … The offers that appear in this table are from partnerships from which Investopedia receives compensation. But employer contributions can be treated differently under the two plan types. Employee contribution limit: $13,500; $16,500 for those age 50 or older. 3 These plans are generally available to small businesses with 100 or fewer employees. Internal Revenue Service (IRS). Many or all of the products featured here are from our partners who compensate us. The SIMPLE 401 (k) plan is a cross between a SIMPLE IRA and a traditional 401 (k) plan and offers some features of both plans. SIMPLE IRA Setup & Administration Costs are Much Lower Running a 401(k) is a lot more complex than a SIMPLE IRA - both for your business and for your provider. Stronger oversight : 401(k) plans have more oversight through the plan trustee, administrator, and advisor pertaining to fees, investment selection and employee education. 1. However, employer contributions for the SIMPLE IRA and the SIMPLE 401(k) are subject to different rules. Before choosing, the owner may want to review certain specifics, including the average age of the business's employees and whether they would prefer loans to be allowed under the plan. A SIMPLE plan can apply for both 401(k) and IRA plans. Required proportional contributions for each eligible employee if you contribute for yourself. It’s quick to set up, and ongoing maintenance is easy and inexpensive. The SIMPLE 401(k) plan is a cross between a SIMPLE IRA and a traditional 401(k) plan and offers some features of both plans. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. Just like the SIMPLE IRA plan, this is a plan just for you: the small business owner with 100 or fewer employees. October is the best time to consider converting a SIMPLE to a 401(k). Employer sets vesting schedule for employer contributions. Our opinions are our own. Accessed April 12, 2020. All financial products, shopping products and services are presented without warranty. For both the SIMPLE IRA and the SIMPLE 401(k), eligible employers must have no more than 100 employees who have received at least $5,000 in compensation from the employer for the previous year. 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. No non-discrimination testing is required for either plan, and both plans are subject to the 60-day annual notification requirement. This easy-to-administer plan is funded solely with employer contributions and is similar to a traditional IRA account. There are a variety of retirement plans at your disposal. However, just as with the SIMPLE IRA plan, there is a two-year grace period if you exceed 100 employees, to … But if you have employees, you are required to provide contributions to their accounts. By using Investopedia, you accept our, Investopedia requires writers to use primary sources to support their work. We want to hear from you and encourage a lively discussion among our users. Property and Casualty insurance services offered through NerdWallet Insurance Services, Inc.: Licenses, NerdWallet Compare, Inc. NMLS ID# 1617539, NMLS Consumer AccessLicenses and Disclosures, California: California Finance Lender loans arranged pursuant to Department of Financial Protection and Innovation Finance Lenders License #60DBO-74812. "SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan." While many employers offer generous matching with their 401(k) plans, such matching is totally optional. The reasons behind this dichotomy are described succinctly below. You may also be able to take advantage of certain employer-sponsored retirement programs, such as a SIMPLE IRA or 401(k) plan. SIMPLE IRA Vs. Roth IRA. For a SEP IRA or a SIMPLE IRA, get started online. This post will help you decide which to use. For high earners especially, the higher contribution limit of the 401(k) makes it a more attractive choice than a SIMPLE IRA. How Do Vesting Rules Differ for a 401(k) Vs SIMPLE IRA? But there are other factors to consider as well. There are two basic types—traditional and Roth. In contrast, the SIMPLE IRA requires employers to contribute either a fixed 2 percent of all employees’ compensation or match up to 3 p… As mentioned earlier, the IRS allows employers to offer a Roth 401(k). Employer does need to offer 3% in 3 of the 5 years for the plan. This option is not available for SIMPLE 401(k)s.. Plan fees can be high, especially for small businesses. (Here’s more on what a SIMPLE IRA is and how to open one.). The SIMPLE IRA requires employer contributions (2% of compensation or a 3% match on elective deferrals) that are fully vested immediately. Contributions to a SIMPLE IRA are immediately 100% vested. Although a 401(k) plan can be more complex to establish and maintain, it provides higher contribution limits and gives you more flexibility to decide if and how you want to contribute to employee accounts. Further, employers can contribute up to 25% of the employee’s contribution into their SEP IRA account with a $57,000 cap for 2020. SIMPLE notices are required to be delivered by November 2, so a decision must be made prior to that for the upcoming year. (Quick reminder: A Roth 401(k) is funded with after-tax contributions in exchange for tax-free distributions in retirement.) There is no Roth version of the SIMPLE IRA. As a result, the two plans will require/allow different employer contribution amounts. Simple IRA Plans Overview. The two have many similarities. Accessed April 12, 2020. Generally, with the SIMPLE IRA vs 401k debate, the IRA option is stronger for individuals and businesses that may need a measure of flexibility, whereas the 401k option does more to promote a sense of continuity for all parties involved. If you are self-employed or a small-business owner, your options may not be limited to SIMPLE IRA vs. 401(k). A simplified employee pension (SEP) is a retirement plan that an employer or a self-employed individual can establish. A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees. The traditional 401(k) offers higher total contribution limits than either the SEP IRA or SIMPLE IRA. A Simple 401K is a cross between a Simple IRA and a traditional 401K plan. A subset of the 401 (k) plan is the SIMPLE 401 (k) plan. No account fees or minimums to open Fidelity retail IRA accounts. Higher setup costs and administrative requirements. There is a 10% penalty for withdrawing funds early from a SIMPLE IRA, and it may be increased to 25% if funds are withdrawn within the first two years. "Choosing a Retirement Plan: SIMPLE 401(k) Plan." #1. "2021 Limitations Adjusted as Provided in Section 415(d). Employees may make salary-deferral contributions, while employers may choose to make matching contributions to employees who make salary-deferral or non-elective contributions. Small business employers have a variety of choices if they want to offer a tax-advantaged retirement plan. A 401(k) plan is a tax-advantaged retirement account offered by many employers. *Simple IRA is $13,500 with catch up provision(age 50 and up) of $3000, *401K is $19,500 with catch-up provision (age 50 and up) $6500 *Both are indexed each year for inflation; Matching features – Simple IRA – Between 1%-3% for active participants. Although a nice perk to attract potential employees, employer contributions are not required of companies that offer 401(k) plans. LIMITATIONS OF A SIMPLE 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. ", IRS. This may influence which products we write about and where and how the product appears on a page. 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. NerdWallet strives to keep its information accurate and up to date. Accessed April 12, 2020. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. Combined contributions of employee and employer are limited to the lesser of 100% of compensation or $57,000 ($63,500 if age 50 or older) in 2020 and $58,000 ($64,500 if age 50 or older) in 2021. We also reference original research from other reputable publishers where appropriate. That said, the IRS allows participants to save in both a SIMPLE IRA and a Roth IRA at the same time. Therefore, if ABC Company had elected to make non-elective contributions, Jane's contribution amount would be the same under both plans. For simplicity, employers might prefer the SIMPLE IRA. There are lower startup costs and operational costs for aa SEP-IRA compared to other retirement plans that would be considered “traditional.”#2. With both 401(k)s and SIMPLE IRAs, the amount of an employee’s contributions are fully vested immediately – meaning they’re owned by the employee. It’s designed for businesses of all sizes – both small and large. i Stockbyte/Stockbyte/Getty Images. They're also always fully vested in a SIMPLE IRA; for a 401 (k), whether they are or not varies based on your plan. Sep-IRA vs Solo 401K If you work as an independent contractor, meaning you get a Form 1099 each pay period instead of a W-2, you’re responsible for your own benefits, including a retirement plan. Internal Revenue Service (IRS). Learn more below about the differences between a SIMPLE vs 401k, and choose 401(k) today, before your chance for this year passes. See the top-rated IRA account providers. Employer contributions deductible on business tax return. "401(k) Plan Qualification Requirements." 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. Employer cannot maintain any other type of retirement plan. Both plans permit the same type of contributions. Employers do not have an annual filing requirement with a SEP-IRA as they do with other retirement plans.#3. By contrast, participants in SIMPLE IRAs are guaranteed at least some matching from their employers. Some plans are an administrative burden and can be quite costly to maintain. Participants who are at least age 50 by the end of the year may make catch-up contributions. "SIMPLE IRA Plan FAQs - Contributions." Employers can establish an account for themselves, in addition to the IRAs which are made available to their employees. Contributing to a Simple IRA The "Simple" in Simple IRA is actually an acronym that stands for Savings Incentive Match Plan for Employees. Small businesses have 3 basic retirement plan options today – 401k, SIMPLE IRAs, and SEP IRAs. Pre-qualified offers are not binding. Some employers prefer SIMPLE 401 (k) plans because they are relatively easy to administer and there are no discrimination tests. 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. Employees may then take a distribution from the Simple IRA or may roll their Simple IRA account into the new 401(k) plan, provided that the employee was a participant in the Simple IRA for at least 2 years prior to the rollover. A SIMPLE IRA plan is similar to a Solo 401k Plan in that it is funded by employee deferrals and additional employer contributions. One difference between a SIMPLE IRA and a 401 (k) is the way employer contributions are treated. It is important to think about them carefully and review the options with financial and tax advisors. 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. They sound similar, but there are important differences between them that employers need to review. Requires minimal administrative management. You can learn more about the standards we follow in producing accurate, unbiased content in our. We’ve laid out the pros and cons for these and other retirement plan options for the self-employed. For the non-elective contributions, employers must contribute 2 percent of the employee's compensation.. 25% penalty on distributions made before age 59½ and within the first two years of participation in the plan. The SIMPLE IRA vs. 401 (k) decision is, at its core, a choice between simplicity and flexibility for employers. An additional voluntary contribution is a payment to a retirement savings account that exceeds the amount that the employer pays as a match. Instead, any employee who earned at least $5,000 during any two preceding years and is reasonably expected to earn $5,000 in the current year must be allowed to participate in the plan. 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