When it comes to retirement planning, it can be difficult to navigate the many different options available. If you’ve been searching for information on different retirement plans, you’ve undoubtedly come across the terms “IRA” and “401k”. But which is the better option for your business?
In this article, we will break down the differences between the SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) and the 401k so that you can make an informed decision about your retirement planning.
Contribution Maximums
According to plan provider Ubiquity, how much you are able to contribute to your plan is one of the most important deciding factors when it comes to retirement plans in general. The two plans in question offer the following:
- The SIMPLE IRA allows contributors under 50 years of age to save up to $13,500 per year and those aged 50 and older to save as much as $19,500 per year.
- 401k plans allow employees and employers under 50 years of age to save $19,500 per year, while those over 50 can save up to $26,500 per year.
Growth Potential
Depending on the nature of your business and your plans for the future, company growth may not be an issue for you. However, if your company has plans to expand, you should consider the options afforded to you by the SIMPLE IRA and the 401k:
- SIMPLE IRA plans can only be implemented in companies who have a maximum of 100 employees.
- 401k plans can accommodate very small or very large companies with no limit to the number of people employed by the company.
Employer Matching
Employer matching can weigh heavily on the decision of employees to sign with a company. However, the required matching rules inherent in a SIMPLE IRA may push employers toward the more flexible 401k matching option:
- Employers must match employee contributions in a SIMPLE IRA.
- 401k plans allow employers to decide whether or not they will match employee contributions.
Plan Initiation and Management
One of the biggest selling points of the SIMPLE IRA is how easy it is to set up as compared to a 401k. This is due to tests, forms, and fees that are a routine part of 401k plans:
- SIMPLE IRAs tend to be easier in terms of set-up and adjustment of the plan. These retirement plans are not subject to IRS compliance testing and generally cost less than 401k plans.
- IRS compliance testing, form filing, and fees are some of the downsides to 401k plans as compared with SIMPLE IRAs.
Tax Considerations
Whether you can make pre-tax or post-tax contributions to your plan is an important consideration. SIMPLE IRAs are more rigid in how your contributions are taxed, while 401k plans give you more choice in the matter:
- SIMPLE IRAs do not allow for “Roth” contributions.
- 401k plans offer both “Roth” and “Traditional” options.
Loans
Funds in your retirement account should generally be left to mature. However, sometimes disaster strikes and you need to turn to your retirement money for help. The SIMPLE IRA and 401k offer the following in terms of loan availability:
- Loans are not permitted with SIMPLE IRAs.
- You have the option to take out a loan with a 401k plan.
