Is a SIMPLE IRA or a 401K Better for Your Small Business?

Of the many decisions that you’ll have to make as a small business owner, what type of retirement plan to offer your employees is one of the most important. Employees consider retirement heavily when deciding on long-term work.

In this article, with the help of 401k plan provider Ubiquity, we will compare a SIMPLE IRA and a 401k side by side to determine which option might be the better choice for your business based on a variety of factors.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees, or SIMPLE IRA is a retirement plan available to small businesses.

What is a 401k?

A 401k is a retirement plan for businesses large and small. There are a variety of types of 401k plans which may be appropriate based on an individual business’s needs.

What are the Differences Between a SIMPLE IRA and a 401k?

For the purposes of this article, the differences between the two retirements plans can be broken down into the categories of contribution maximums, business growth considerations, employer contribution responsibility, vesting requirements, plan management, tax considerations, and loan availability.

  • Contribution Maximums. With a SIMPLE IRA, employers and workers under the age of 50 can contribute $13,500. This is compared to a $19,500 maximum limit for a 401k plan. When contributing members are 50 or older, the contribution limits are $19,500 and $26,000 for SIMPLE IRAs and 401Ks respectively.
  • Business Growth Considerations. SIMPLE IRAs are available exclusively to small businesses with 100 or fewer employees. 401k plans, on the other hand, can be utilized by both large and small businesses: from companies with 1 employee, to companies with hundreds of employees.
  • Employer Contribution Responsibility. SIMPLE IRAs necessitate that employers match all employee contributions, whereas 401k plans allow employers to decide whether or not they will match workers’ contributions.
  • Vesting Requirements. With a SIMPLE IRA, employees are required to vest contributions immediately. However, when it comes to 401k plans, individuals can choose to immediately vest, or do it on a schedule.
  • SIMPLE IRAs tend to, on average, be less complicated in terms of set-up and plan management. Generally, 401k plans come with testing requirements and forms must be submitted each year.
  • Tax Considerations. A SIMPLE IRA affords the individual only the option of “traditional” tax options. In contrast, a 401k plan allows contributors the option of deciding to pay taxes through the “Traditional” route or setting up a “Roth” 401k and paying taxes up front.
  • Loan Availability. The SIMPLE IRA does not allow for taking a loan out from the fund, unless the individual wants to incur a huge penalty. Alternatively, 401k plans do allow for the ability to remove funds from the account.

Final Thoughts.

When it comes down to it, your decision of which type of retirement plan to implement for your business is going to be based on you and your employees’ needs and desires. A 401k tends to offer a broader range of options for investment and better payoff in the long run. However, 401k plans can come with more administrative hassle and may not be the right fit for your small business.

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