Exploring SIMPLE IRA vs 401k – Which Plan Suits You?

Wondering about comparing a Simple IRA vs 401k pros and cons? As an employer, you are responsible for your employees while they are serving your team. To improve their quality of life, we help them plan for their future after they stop working. This way, they can concentrate on their daily tasks without worrying about their retirement. You should carefully consider how your business planning choices affect your employees’ future quality of life.

Retirement planning helps employees have financial security after they stop working. It also makes your company more attractive to job seekers by offering these valuable benefits.

Small businesses no longer have to forgo retirement benefits. These benefits, once only available for larger companies, have become much more accessible in recent years. With so many available options, companies must distinguish the right plan for their team. Some important things to consider before comparing plans are:

• Who are the employees you want to give benefits to, and what benefits will you give them?
• What is your budget for retirement benefits?
• Will these benefits also include part-time employees or only full-time employees?

You can explore various retirement plans after understanding how these questions relate to your company. Some options to consider are the 401k, SIMPLE IRA plan, and SIMPLE 401k. Evaluating these plans will assist you in determining the most suitable choice for your needs. This will help you decide which option is most suitable for you.

Feature	SIMPLE IRA	Simple 401(k)	401(k)
Eligibility	Small businesses with <100 employees	Small businesses with <100 employees	Any employer
Employee Contribution	Up to $13,500 (subject to change annually)	Up to $13,500 (subject to change annually)	Up to $19,500 (subject to change annually)
Catch-up Contribution	$3,000 for employees aged 50 or older	$3,000 for employees aged 50 or older	$6,500 for employees aged 50 or older
Employer Contribution	Required match up to 3% or 2% non-elective contribution	Required match up to 3% or 2% non-elective contribution	Optional, employer may choose to match employee contributions or make profit-sharing contributions
Vesting	Immediate vesting of employee and employer contributions	Immediate vesting of employee and employer contributions	Employer contributions may have a vesting schedule
Withdrawals	Subject to ordinary income tax and 10% penalty before age 59½ (with some exceptions)	Subject to ordinary income tax and 10% penalty before age 59½ (with some exceptions)	Subject to ordinary income tax and 10% penalty before age 59½ (with some exceptions)
Loans	Not permitted	Not permitted	Permitted (subject to plan rules)
Plan Administration	Simpler administrative requirements	Simpler administrative requirements	More complex administrative requirements
Contribution Limits	Lower contribution limits	Lower contribution limits	Higher contribution limits
Investment Options	May have limited investment options	May have limited investment options	Wide range of investment options
Portability	Can be rolled over to a Traditional IRA or another employer’s retirement plan	Can be rolled over to a Traditional IRA or another employer’s retirement plan	Can be rolled over to a Traditional IRA or another employer’s retirement plan
Tax Treatment	Contributions are tax-deductible; earnings grow tax-deferred	Contributions are tax-deductible; earnings grow tax-deferred	Contributions are tax-deductible; earnings grow tax-deferred

What are SIMPLE Retirement Plans for Small Businesses?

SIMPLE stands for Savings Incentive Match Plan for Employees. These plans are designed for businesses with 100 employees max that earn at least 5,000 dollars a year. SIMPLE plans are easy to create and exist for both 401ks and IRAs. They lack some of the perks featured in more traditional plans.

SIMPLE Retirement Plans were created with the small business owner in mind and considered the smaller teams and budgets.

Compared to the traditional 401k, SIMPLE Retirement Plans offer small businesses the same retirement savings options without forcing them into bankruptcy. This can give employers the benefits of offering retirement plans to their employees without forcing them to take on significant financial risk.

Everything You Need to Know About a Traditional 401k

When compared to a SIMPLE 401 k plan or IRA, traditional 401ks afford employees greater flexibility with more perks, but these perks come at a greater expense to the company. There are several options to garner funding from the employee within the traditional 401k landscape, including regular contributions from their paycheck.

Traditional 401ks must undergo the following testing to ensure high standards and fairness in employer contributions:

• Top-Heavy Test: Compares benefits dispersed to owners and officers of the company compared to other employees.
• Average Deferral Percentage (ADP) test: Compares highly compensated vs. non-highly compensated employees’ deferrals.
• Average Contribution Percentage (ACP) test: Compares highly compensated vs. non-highly compensated employees’ after-tax contributions and matching employer contributions.

Compliance with these tests is required by law and is measured annually. Failure to comply with these tests can lead to hefty fines, legal trouble, and even the termination of benefits plans. Traditional 401k plans have often left small businesses entirely out of the retirement benefits conversation.

A SIMPLE Retirement Plan might be a better fit if a traditional 401k is out of your company’s price range.

Everything You Need to Know About a SIMPLE 401k

SIMPLE 401ks, unlike their traditional counterpart, are not subject to the strict annual anti-discrimination testing. Contributions are immediately vested, which means that employees can withdraw their entire 401k balance at any time.

Contribution limits are lower than in a traditional 401k plan, and perks are fewer, yet SIMPLE 401ks can make retirement benefits a reality for small businesses with a tighter budget than massive corporations. While it’s not usually as beneficial for employees as traditional 401ks, it’s certainly much better than having no retirement benefits at all.

To have access to a SIMPLE 401k, employees and employers must meet the following requirements:

• Have no more than 100 employees working for the company
• Employees with plans have received at least $5000 in compensation that year
• Employers cannot offer additional plans to employees that qualify but can offer additional retirement plans to any employees that do not qualify
• Employer contributions must be either a 2% nonelective contribution based on an employee’s pay or a matching contribution of 3% of an employee’s pay

Everything You Need to Know About a SIMPLE IRA

SIMPLE IRAs allow employees and their employers to make a simple employee contribution to Individual Retirement Arrangements. With a SIMPLE IRA:

• Employer contributions made to accounts for participating eligible employees;
• Employees can pay a portion of their paycheck toward their retirement account;
• Each employee is 100% vested;
• Both employer and employee contribute

While both parties can contribute, employers are required to contribute. Employers can either make a non elective contribution of a minimum of 2% of the compensation for employees who earned at least 5,000 dollars or a matching contribution of up to the first 3% of compensation.

Is a Simple 401k or a Simple IRA Better for My Small Business?

Both plans allow small businesses to establish a SIMPLE fund for their employees’ retirement. There are some differences between SIMPLE IRA vs 401k savings.

• SIMPLE IRA does not permit taking loans; SIMPLE 401k does.
• Only employees covered by collective bargaining agreements can enjoy retirement plans outside of their SIMPLE IRA.
• SIMPLE IRA has no age restrictions, while SIMPLE 401k holders must be at least 21 years old.

When choosing which of these options best suits your business, it is important to reflect on the answers to these initial questions posed earlier in this piece:

• What are the demographics of the employees you hope to provide benefits to, and what benefits do you plan to offer them?
• What is your budget for retirement benefits?
• Will these benefits also include part-time employees?

For instance, a company with employees aged 21-40 might find a SIMPLE 401k more suitable. Many individuals in this age range aim to purchase homes, which could lead to them needing to withdraw loans from their 401k.

For a company with the majority of employees aged 45 and older, a SIMPLE IRA may prove the best option when stacked against the more traditional 401k.

How Do a Traditional 401k and a SIMPLE IRA Differ

While resembling the conventional 401k, SIMPLE IRAs cater to small businesses with 100 employees or less. Employers have no obligation to contribute to 401k plans.

Employees own 100% vested contributions in a SIMPLE IRA. Contribution rules differ from 401k to 401k, likely due to larger companies paying the type of salaries that can cover building 401k savings gradually over time, making employer contributions a nice yet unrequired bonus.

Simple IRA vs 401k: How Much Can I Contribute?

As one might infer, higher contribution limits tend to be on traditional 401ks as opposed to their SIMPLE IRA counterparts. This is likely due to traditional 401ks’ higher buy-in value and additional perks compared to a SIMPLE IRA.

For 2023, the 401k contribution limit has been set at $22,500 – the additional catch up contribution for employees 50 or older age is limited to $7,500.

SIMPLE IRAs, on the other hand, have a limit of $15,500 — catch up contributions for employees 50 and up can be up to $35,000, their existing plan permitting. Employees participating in an additional plan can contribute up to $22,500.

Finding the Plan That’s Best for Your Business

For small to midsize businesses, having a retirement plan in place for your employees keeps your company competitive in the job market. It gives your employees the peace of mind that they can look after themselves in the future.

Retirement plans are not one-size-fits-all, like the employers and employees they serve. Even after carefully reviewing your company’s unique needs, you may still be at a loss as to which plan to choose. This is where a retirement benefits broker can prove invaluable as your business considers all available options.

The insider knowledge and expertise that only a retirement benefits broker provides can begin to cut through the noise, helping you to access the best available benefits for your team. With their guidance, you can rest easy knowing that you’ve made the right choice regarding retirement options for your company and your employees.