401(k) vs Simple IRA

The Simple IRA and 401(k) retirement plans may sound similar, but in fact, they’re two very different accounts designed to offer workers a variety of benefits.

401(k) retirement plan is offered by an employer and is designed to help employees save for retirement.

The Simple IRA plan, on the other hand, allows employers and employees to jointly contribute to an individual retirement account. Employers are not required to offer this plan, however, it does allow for employees who are self-employed or small business owners to save money for their retirement.

It’s important to understand the differences between these two types of accounts so you can make an informed decision in terms of saving for your future.

401(k) Definition

401(k) is a retirement savings plan sponsored by employers in the United States. The pan was first introduced in 1978 and this has become one of the most popular retirement savings for individuals to invest their income tax efficiently.

This retirement plan is well appreciated because when you retire, 401(k)s deferred taxes on your gains. This means that when you withdraw from the plan, you will pay income tax on gains and not when you earned it.

Another key feature of 401(k) is that employers are allowed to match their employees’ contributions.

That means for every dollar you contribute, the employer will also contribute a certain percentage to your plan. This matching percentage can be defined by the company’s policy.

The 2021 contribution limit for 401(k)s is $19,500. For over 50 years old, the contribution limit is $26,000.

Simple IRA Definition

Simple IRA which stands for Savings Incentive Match Plan for Employees is employer-sponsored that is intended for small businesses with 100 employees or less.

This means that employees and employers jointly contribute a certain percentage of the employee’s salary to the account. However, only the employees who make at least $5,000 in the Simple IRA account can participate.

For regular employees, they can contribute up to $13,500 in their account per year, and employees who are over 50 years old, can contribute up to $16,500.

An employer can either match the simple IRA contributions up to 3% or contribute 2% of the employee’s salary up to the total contribution limit which is $285,000.

401(k) vs Simple IRA

When evaluating a 401(k) vs Simple IRA retirement plan option, it is very important to note their differences. This way, you as an individual can choose the best type of account that fits your needs and lifestyle.

Employer Eligibility

The first difference between the two retirement plans is employer eligibility. As noted earlier, a Simple IRA is not open to all employers as the name of the plan suggests. On the other hand, almost any employer can apply for a 401(k).

This means that Simple IRA will only be available to eligible businesses with 100 employees or less.

Employee Eligibility

Another difference between 401(k) and Simple IRA is the eligibility of employees.

As mentioned earlier, Simple IRA only allows eligible employees to contribute to this account. This means that only employees who have compensation of at least $5,000 can make Simple IRA contributions.

401(k)s on the other hand, allow any employee to contribute regardless of salary. This means that even interns and part-time employees can make 401(k) contributions under certain conditions.

Investment Options

Both accounts have investment options. But, the Simple IRA limits the number of investment options compared to 401(k).

Simple IRA has a small list of mutual funds that employees can choose from. It also restricts employers’ ability to offer other types of investments like real estate and bonds. This is because Simple IRA is simple to administer and simple to offer.

401(k) allows employers an array of investment options that they can offer their employees.

However, it is important to note that the Simple IRA plan is more beneficial compared to 401(k). This is because Simple IRA has lower administration costs as well as a simpler reporting system.

Administration and Contributions

401(k) is simple to administer as you need to file simple forms with each contribution. But, the employer needs to make sure that employees are participating in the plan.

As for Simple IRA, it may require more work by employers as they will have to ensure that all employee contributions are made every pay period before their paychecks are processed.

Reporting and Taxation

Contribution limits for Simple IRA accounts can be set as high as $13,500 or $16,500 if you are over 50 years old. On the other hand, 401(k) allows individual employees up to $19,500 contributions per year for individuals younger than 50 and $26,000 for those over 50 years old.

In addition, Simple IRA wins with a larger contribution limit per year. However, the tax advantages of 401(k) make them very appealing to many individuals who are looking to save for their retirement.

Withdrawal and Penalty Fees

There is no penalty fee for Simple IRA early withdrawal under any circumstances. However, 401(k) fees may be charged by the account administrator if you withdraw your funds before age 59 1/2 years old.

Which One Is Better for Your Retirement Savings Plan?

It all boils down to simple facts. If you are looking for a Simple IRA vs 401(k) comparison, first determine the eligibility requirements of each account type then compare their benefits and drawbacks. This will help you choose which best fits your lifestyle and financial goals.

The Simple IRA is a great choice for employees who are looking to save since it often requires less work from the employer and doesn’t require individuals to spend time on filling forms or handling investments.

On the other hand, 401(k) plans offer more benefits such as higher contribution limits and favorable taxation. Therefore, 401(k) plans are ideal for self-employed individuals.

Overall, choosing a retirement plan is simple if you compare both accounts based on their yearly contribution limits, eligibility requirements, and administration. Your final decision should be the best fit for your lifestyle and financial goals.

Final Thoughts

So we see that simple IRA and 401(k) plans are simple to understand and simple to make a choice with. But, complicated situations call for an expert’s advice.

This is why it may be important to consult a financial adviser or accountant if you need guidance on which type of plan will best suit your lifestyle and financial goals.

The 401(k) plan was introduced to help employees save for their future either as a supplement to their existing retirement plans or as an alternative. This plan is simple to set up, simple to understand, and simple to maintain. However, the employer must make sure that employees are participating in the 401(k) plans.
A Simple IRA is a type of retirement plan that was established to help small companies and self-employed individuals save for their retirement.
Yes, there are several areas where Simple IRA and 401(k) plans can be compared. This is because Simple IRA has lower administration costs as well as a simpler reporting system, thus requiring more work from the employer. However, 401(k) offers beneficial taxation that makes them preferable to many individuals who are looking for retirement savings.
The contribution limit is $13,500 or $16,500 if you are over 50 years old. On the other hand, 401(k) allows individual employees up to $19,500 contributions per year for individuals younger than 50 and $26,000 for those over 50 years old.
The Simple IRA and 401(k) comparison is simple if you compare both accounts based on their yearly contribution limits, eligibility requirements, and administration. Your final decision should be the best fit for your lifestyle and financial goals.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.