What You Can Expect from a SIMPLE IRA or 401kNovember 13, 2021
Most workers are looking for fairly simple things in their jobs:
- A good, stable position,
- Compensation that enables them to live comfortably,
- Assurance that they will be able to retire at some point and not have to worry about their finances.
The last point above, is where employers can attract excellent, loyal workers by offering a competitive retirement plan. But which plan should an employer offer to his or her workers, the SIMPLE IRA or the 401k?
Both of these plans offer good incentives, but it can be hard to determine which plan is the best choice, as every company has unique needs.s
In this article, we’ll break down the differences between these two common retirement plan options.
Differences in Contribution Limit
The 401k allows eligible employees to contribute up to $19,500 to their plans per year. For those over the age of 50, the contribution limit jumps up to $26,000 per year.
This dwarfs the allowable contribution limit for SIMPLE IRA plans, which max out at $13,500 for those under the age of 50 and $19,500 for those over the age of 50.
Differences for Number of Employees
The SIMPLE IRA plan is, unfortunately, only available for companies who have fewer than 100 employees. Once companies exceed this number, they are no longer eligible for the SIMPLE IRA plan.
However, 401k plans can cater to companies that only have 1 employee, and those that have many hundreds of employees.
Therefore, companies who expect to grow significantly should definitely consider starting a 401k plan rather than a SIMPLE IRA.
Differences in Terms of Loan Availability
The SIMPLE IRA does not allow for loans to be taken from retirement accounts. The contributor can make withdrawals whenever he or she would like, but they will be penalized for doing so.
401k plans, on the other end of the spectrum, allow for account holders to take out loans when needed. This provides some relief to employees, as they know they always have some money to fall back on when times get tough.
Differences in Ease of Plan Maintenance
If you are looking for a plan that is easy to set up, easy to modify, and easy to maintain; look no further than the SIMPLE IRA. This plan requires very little time commitment to get it up and running, and there are very few things that need to be done to maintain the plan.
In contrast, the 401k plan requires yearly compliance testing by the IRS as well as significant amounts of paperwork that must be filed each year.
Differences in Employer Matching Requirements
A big consideration that employers must make, is that of matching contributions.
SIMPLE IRA plans necessitate that employers match the contributions of all employees.
401k plans have no such requirement. If employers want to match employee contributions in order to make their plan more competitive, they can do so. But there is no requirement for this decision with a 401k.
Ready to start a retirement plan for your business? Contact a plan provider today to discuss your needs!