Employee contribution limit: $13,500; $16,500 for those age 50 or older. A simplified employee pension (SEP) is a retirement plan that an employer or a self-employed individual can establish. They're mandatory in a SIMPLE IRA but optional for a 401 (k). Here's a comparison of three popular self-employed retirement savings plans: the solo 401(k), the SEP IRA and a SIMPLE IRA. SIMPLE plans are designed for business with 100 employees or fewer who earn $5,000 or more per year. If that’s the case, contribution limits should weigh heavily in your decision. A 401 (k) and IRA are both tax-advantaged retirement accounts, but 401 (k)s are offered by employers (who often match employee contributions), whereas IRAs can be … Employees may then take a distribution from the Simple IRA or may roll their Simple IRA account into the new 401(k) plan, provided that the employee was a participant in the Simple IRA for at least 2 years prior to the rollover. The aptly named SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is the more straightforward of the two options. Participants may be allowed to choose account provider. Employer sets vesting schedule for employer contributions. There is no Roth version of the SIMPLE IRA. The SIMPLE IRA vs. 401 (k) decision is, at its core, a choice between simplicity and flexibility for employers. Similar to their IRA counterpart, the 2019 contribution limit for SIMPLE 401 (k) plans is $13,000. Many or all of the products featured here are from our partners who compensate us. A SIMPLE IRA is only available to small businesses with 100 or fewer employees. Internal Revenue Service (IRS). Both plans permit the same type of contributions. The following is an example of how this could affect the contributions that employees receive., ABC Company established a SIMPLE for its employees and has elected to make a matching contribution to the plan for the 2020 calendar year. While the SEP IRA and SIMPLE IRA look a lot like traditional 401 (k) programs, they differ in important respects from that as well as from each other. Dayana Yochim is a former NerdWallet authority on retirement and investing. The traditional 401(k) offers higher total contribution limits than either the SEP IRA or SIMPLE IRA. Our opinions are our own. Rollover rules are also different for a SIMPLE IRA versus a 401 (k). "Choosing a Retirement Plan: SIMPLE IRA Plan." Internal Revenue Service (IRS). However, employer contributions for the SIMPLE IRA and the SIMPLE 401(k) are subject to different rules. Employer does need to offer 3% in 3 of the 5 years for the plan. What Is an Additional Voluntary Contribution (AVC)? "SIMPLE IRA Plan FAQs - Participation." For simplicity, employers might prefer the SIMPLE IRA. But there are other factors to consider as well. A subset of the 401 (k) plan is the SIMPLE 401 (k) plan. » Ready to open a SIMPLE, traditional or Roth IRA? Simple IRA vs 401(k) vs Solo 401(k) vs SEP IRA This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. Higher setup costs and administrative requirements. SIMPLE notices are required to be delivered by November 2, so a decision must be made prior to that for the upcoming year. This option is not available for SIMPLE 401(k)s.. SIMPLE IRA Setup & Administration Costs are Much Lower Running a 401(k) is a lot more complex than a SIMPLE IRA - both for your business and for your provider. For example, if you run a business with no employees, a solo 401(k) is worth considering. She receives compensation of $350,000 for the year from the company. 1. i Stockbyte/Stockbyte/Getty Images. The account is subject to many of the same rules as a traditional IRA: Contributions reduce your taxable income for the year, but distributions in retirement are taxed as ordinary income. You may also be able to take advantage of certain employer-sponsored retirement programs, such as a SIMPLE IRA or 401(k) plan. The SIMPLE IRA vs. 401(k) decision is, at its core, a choice between simplicity and flexibility for employers. By using Investopedia, you accept our, Investopedia requires writers to use primary sources to support their work. Instead, any employee who earned at least $5,000 during any two preceding years and is reasonably expected to earn $5,000 in the current year must be allowed to participate in the plan. NerdWallet strives to keep its information accurate and up to date. For a 401(k), call our workplace team at 866-418-5173. Employers cannot maintain any other retirement plan for employees who are eligible to participate in the SIMPLE 401(k). However, the employer can choose to maintain a second retirement plan to cover those employees who are not eligible to participate in the SIMPLE 401(k) plan. 1. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. Generally, with the SIMPLE IRA vs 401k debate, the IRA option is stronger for individuals and businesses that may need a measure of flexibility, whereas the 401k option does more to promote a sense of continuity for all parties involved. A SIMPLE IRA is a retirement savings plan that can be used by most small businesses with 100 or fewer employees. Traditional and Roth Individual retirement accounts (IRA) are available to almost all taxpayers who have earned income, providing tax-deferred retirement options. These include white papers, government data, original reporting, and interviews with industry experts. For flexibility, a 401(k) plan provides a wider array of choices, including a Roth option. 3  These plans are generally available to small businesses with 100 or fewer employees. Simple IRA vs. 401(k) There is a wide variety of of retirement account types available to savers. Pre-qualified offers are not binding. The SIMPLE 401 (k) plan is a cross between a SIMPLE IRA and a traditional 401 (k) plan and offers some features of both plans. Contributions to a SIMPLE IRA are immediately 100% vested. However, this does not influence our evaluations. There are also some minimum income limits that employees must meet to qualify for the plan. Combined contributions of employee and employer are limited to the lesser of 100% of compensation or $57,000 ($63,500 if age 50 or older) in 2020 and $58,000 ($64,500 if age 50 or older) in 2021. Accessed April 12, 2020. An annual tax filing of Form 5500 is also required with the SIMPLE 401 (k). Contributing to a Simple IRA The "Simple" in Simple IRA is actually an acronym that stands for Savings Incentive Match Plan for Employees. For both the SIMPLE IRA and the SIMPLE 401(k) plans, all contributions are immediately 100% vested. Although a nice perk to attract potential employees, employer contributions are not required of companies that offer 401(k) plans. Internal Revenue Service (IRS). It’s designed for businesses of all sizes – both small and large. "Choosing a Retirement Plan: SIMPLE 401(k) Plan." In addition to the standard traditional IRA/Roth IRA options that everybody has, you have three more noteworthy options: Simplified Employee Pension (SEP IRA), Savings Incentive Match Plan for Employees (SIMPLE IRA), and; Individual 401(k) — sometimes called … The two have many similarities. Savings Incentive makes it possible for companies with as few as two employees to establish a 401(k) or IRA. SIMPLE accounts can be established by employers, including self-employed individuals. An employer can contribute a 25% maximum of an employee’s pay to a SEP-IRA.#4. Employer cannot maintain any other type of retirement plan. Employees may make salary-deferral contributions, while employers may choose to make matching contributions to employees who make salary-deferral or non-elective contributions. You also have the freedom to set vesting terms, which allows you to require employees remain employed by you for a set time before taking ownership of your contributions to their accounts. An additional voluntary contribution is a payment to a retirement savings account that exceeds the amount that the employer pays as a match. This deadline allows employees to make salary-deferral contributions before year-end. To be eligible to participate in the SIMPLE 401(k) plan, employees may be required to perform service for at least one year and reach the age of 21.. They sound similar, but there are important differences between them that employers need to review. When evaluating offers, please review the financial institution’s Terms and Conditions. When evaluating offers, please review the financial institution’s Terms and Conditions. 401k plans Employer contributions deductible up to IRS limits. "401(k) Plan Qualification Requirements." However, just as with the SIMPLE IRA plan, there is a two-year grace period if you exceed 100 employees, to … These plans share many similarities, but they also have differences that could provide enough reason to choose one type of SIMPLE plan over the other. Simple IRA Plans Overview. Participants who are at least age 50 by the end of the year may make catch-up contributions. To help decide which plan is best, answer the following questions: For many small-business owners, the answer is that they’re trying to maximize their own retirement savings dollars. No account fees or minimums to open Fidelity retail IRA accounts. Some plans are an administrative burden and can be quite costly to maintain. How Do Vesting Rules Differ for a 401(k) Vs SIMPLE IRA? We also reference original research from other reputable publishers where appropriate. To help choose the right plan for your business, you need to understand their features and match them to your priorities (e.g., higher contributions or simpler administration). Investing involves risk, including risk of loss. The offers that appear in this table are from partnerships from which Investopedia receives compensation. The amount Jane receives as an employer contribution is determined by the type of SIMPLE that ABC adopted: As stated earlier, the non-elective contribution is subject to the same compensation cap for both plans. Sep-IRA vs Solo 401K If you work as an independent contractor, meaning you get a Form 1099 each pay period instead of a W-2, you’re responsible for your own benefits, including a retirement plan. Your two main choices are a SEP-IRA or a Solo 401K. *Simple IRA is $13,500 with catch up provision(age 50 and up) of $3000, *401K is $19,500 with catch-up provision (age 50 and up) $6500 *Both are indexed each year for inflation; Matching features – Simple IRA – Between 1%-3% for active participants. The drawbacks: Like the SIMPLE IRA, a SEP requires employers to contribute to eligible employee accounts, and no Roth version is allowed. Accessed April 12, 2020. Although a 401(k) plan can be more complex to establish and maintain, it provides higher contribution limits and gives you more flexibility to decide if and how you want to contribute to employee accounts. Please help us keep our site clean and safe by following our, Prevent identity theft, protect your credit, The difference between term and whole life insurance, How medical conditions affect your life insurance rate, SIMPLE IRA vs. 401(k): The Pros and Cons of Each Plan. Before choosing, the owner may want to review certain specifics, including the average age of the business's employees and whether they would prefer loans to be allowed under the plan. To qualify, employers must have no more than 100 employees who have received at least $5,000 in compensation from the employer for the previous year. An employer who chooses a SIMPLE IRA is not allowed to maintain any other plan while maintaining a SIMPLE IRA., Exceptions are allowed for employees covered under a collective bargaining agreement, and plans that cover these employees are disregarded for this purpose.. Employee contribution limit: $19,500; $26,000 for those age 50 or older. Another big difference is that you can opt for a Roth version of the plan, whereas the SIMPLE IRA allows no Roth provision. Internal Revenue Service (IRS). Employer contributions deductible on business tax return. Unlike the SIMPLE IRA, which is limited to small businesses, public and private companies of any size can set up a 401(k). A Simple 401K is a cross between a Simple IRA and a traditional 401K plan. This can make it difficult to know which plans are best suited for you and your business. Internal Revenue Service (IRS). Employers can establish an account for themselves, in addition to the IRAs which are made available to their employees. Choosing a retirement plan is one of the most important financial decisions a business owner will make for their business. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. A SIMPLE IRA is another type of investment plan that allows small businesses to help their employees save for retirement. Employers do not have an annual filing requirement with a SEP-IRA as they do with other retirement plans.#3. Small businesses have 3 basic retirement plan options today – 401k, SIMPLE IRAs, and SEP IRAs. Read more. In contrast, the SIMPLE IRA requires employers to contribute either a fixed 2 percent of all employees’ compensation or match up to 3 p… One difference between a SIMPLE IRA and a 401 (k) is the way employer contributions are treated. No non-discrimination testing is required for either plan, and both plans are subject to the 60-day annual notification requirement. The deadline to establish either plan is from January 1 to October of the year. As such, 401(k)s require fees to pay for administration services such as recordkeeping, asset-custody, and third-party administration. This post will help you decide which to use. Property and Casualty insurance services offered through NerdWallet Insurance Services, Inc.: Licenses, NerdWallet Compare, Inc. NMLS ID# 1617539, NMLS Consumer AccessLicenses and Disclosures, California: California Finance Lender loans arranged pursuant to Department of Financial Protection and Innovation Finance Lenders License #60DBO-74812. #1. Just like the SIMPLE IRA plan, this is a plan just for you: the small business owner with 100 or fewer employees. As the employer and (your own) employee, you’re allowed to contribute a total of up to $57,000 in 2020 (or $63,500 if you’re age 50 or older) and $58,000 (or $64,500 if age 50 or older) in 2021. "SIMPLE IRA Plan FAQs - Contributions." For the non-elective contributions, employers must contribute 2 percent of the employee's compensation.. Accessed April 12, 2020. A Savings Incentive Match Plan for Employees (SIMPLE) is a tax-deferred retirement savings account. This easy-to-administer plan is funded solely with employer contributions and is similar to a traditional IRA account. ", Investopedia uses cookies to provide you with a great user experience. All financial products, shopping products and services are presented without warranty. Accessed April 12, 2020. Her work has been featured by Forbes, Real Simple, USA Today, Woman's Day and The Associated Press. Disclaimer: NerdWallet strives to keep its information accurate and up to date. The SIMPLE 401(k) plan is a cross between a SIMPLE IRA and a traditional 401(k) plan and offers some features of both plans. But if you have employees, you are required to provide contributions to their accounts. A 401(k) plan is a tax-advantaged retirement account offered by many employers. (Here’s more on what a SIMPLE IRA is and how to open one.). Jane, an employee, is eligible to participate in the plan. "Income Ranges for Determining IRA Eligibility Change for 2021. Plan fees can be high, especially for small businesses. For employees who need to tap into their retirement assets when they are ineligible to receive distributions from the plan, loans can be an attractive plan feature. For both the SIMPLE IRA and the SIMPLE 401(k), eligible employers must have no more than 100 employees who have received at least $5,000 in compensation from the employer for the previous year. By contrast, participants in SIMPLE IRAs are guaranteed at least some matching from their employers. Internal Revenue Service (IRS). We’ve laid out the pros and cons for these and other retirement plan options for the self-employed. "2021 Limitations Adjusted as Provided in Section 415(d). For instance, all employer contributions to a SIMPLE 401(k) are subject to the compensation cap (which is $290,000 for 2021, up from $285,000 for 2020), while only non-elective employer contributions to SIMPLE IRAs are subject to the compensation cap. Small business employers have a variety of choices if they want to offer a tax-advantaged retirement plan. 4  A SIMPLE IRA works like a cross between traditional IRAs and 401 (k) plans. For high earners especially, the higher contribution limit of the 401(k) makes it a more attractive choice than a SIMPLE IRA. The retirement plan not only allows the employer to claim a tax deduction for contributions but also serves as a means of attracting highly competent employees. A SIMPLE IRA plan is similar to a Solo 401k Plan in that it is funded by employee deferrals and additional employer contributions. However, unlike a Solo 401k Plan, a SIMPLE IRA plan uses an IRA-type trust to hold contributions for each employee, rather than a single plan trust that is typical of a traditional employer 401 (k) Plan. The SIMPLE IRA requires employer contributions (2% of compensation or a 3% match on elective deferrals) that are fully vested immediately. Requires minimal administrative management. With both 401(k)s and SIMPLE IRAs, the amount of an employee’s contributions are fully vested immediately – meaning they’re owned by the employee. Employer matching with a 401(k) is flexible as long as the plan is not discriminatory. Therefore, if ABC Company had elected to make non-elective contributions, Jane's contribution amount would be the same under both plans. 457 plans are non-qualified, tax-advantaged, deferred compensation retirement plans offered by state, local government and some nonprofit employers. On the other hand, 401(k) plans allow employees to contribute more to their retirement than a SIMPLE IRA if they choose. You can learn more about the standards we follow in producing accurate, unbiased content in our. Here are the need-to-know differences between SIMPLE IRAs and 401(k)s: Startup costs and ease of setup often dictate the choice between retirement savings plans. There is a 10% penalty for withdrawing funds early from a SIMPLE IRA, and it may be increased to 25% if funds are withdrawn within the first two years. Eligibility requirements are identical to that of SIMPLE 401(k)s: Any employer with fewer than 100 employees who earned $5,000 or more in the previous year can opt into the plan. They're also always fully vested in a SIMPLE IRA; for a 401 (k), whether they are or not varies based on your plan. ", IRS. No limit on employer matching contribution; if using the 2% contribution based on compensation, employer match allowed on up to $285,000 of salary ($290,000 in 2021). The reasons behind this dichotomy are described succinctly below. Accessed April 12, 2020. SIMPLE IRA Vs. Roth IRA. SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan, Choosing a Retirement Plan: SIMPLE IRA Plan, Choosing a Retirement Plan: SIMPLE 401(k) Plan, 2021 Limitations Adjusted as Provided in Section 415(d), Income Ranges for Determining IRA Eligibility Change for 2021. This may influence which products we write about and where and how the product appears on a page. Employers offering SIMPLE 401 (k)s are also granted a two-year grace period in the event their company surpasses 100 employees. Additionally, employers are allowed only to maintain Simple 401K. There are two basic types—traditional and Roth. All financial products, shopping products and services are presented without warranty. See which option is right for your retirement planning needs. Employer contributions to employee SIMPLE IRA accounts are mandatory, though you can choose between two matching arrangements dictated by the IRS. Or an employer could choose between a SIMPLE 401(k) and a SIMPLE IRA. Employee contributions vest immediately. See the top-rated IRA account providers. That said, the IRS allows participants to save in both a SIMPLE IRA and a Roth IRA at the same time. Required proportional contributions for each eligible employee if you contribute for yourself. It’s quick to set up, and ongoing maintenance is easy and inexpensive. Internal Revenue Service (IRS). It is important to think about them carefully and review the options with financial and tax advisors. The conventional wisdom regarding the Solo 401 (k) vs SEP IRA question is that self-employed people should choose the Solo 401 (k) because … For a SEP IRA or a SIMPLE IRA, get started online. While many employers offer generous matching with their 401(k) plans, such matching is totally optional. Some employers prefer SIMPLE 401 (k) plans because they are relatively easy to administer and there are no discrimination tests. retirement plan options for the self-employed, Smart Money Podcast: Reducing Taxes, and Picking the Best Investing Platform, 6 Tips to Help Your Portfolio Weather the Coronavirus Crash, All employees who have compensation of at, All employees at least 21 years old who worked at least 1,000 hours in a previous year, No annual tax filing requirements; annual plan details must be sent to employees, Subject to annual compliance testing to ensure plan does not favor highly compensated employees, Any investments available through the financial institution that holds accounts, Investment selection curated by employer and plan administrator. LIMITATIONS OF A SIMPLE Learn more below about the differences between a SIMPLE vs 401k, and choose 401(k) today, before your chance for this year passes. A small business owner who wants to avoid complex administration and limit costs may find SIMPLE plans attractive. Pre-qualified offers are not binding. For example, instead of a traditional 401(k) plan, a small business owner can opt for a SIMPLE 401(k). As mentioned earlier, the IRS allows employers to offer a Roth 401(k). "SIMPLE IRA Plan FAQs - Establishing a SIMPLE IRA Plan." Accessed April 12, 2020. Borrowing is allowed with a 401(k). For the matching contributions, employers must contribute dollar for dollar up to 3 percent of the employee's compensation. A SIMPLE IRA is an employer-sponsored retirement plan that lets employers and employees contribute to individual IRAs established for every employee under the plan. A SEP IRA also has a high contribution limit for business owners and self-employed individuals, though there is no catch-up contribution for savers 50 or older. For all small-business plans, call us at 800-544-5373. But employer contributions can be treated differently under the two plan types. A SIMPLE IRA is a retirement plan designed for small businesses with 100 or fewer employees. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. And the contribution limits are lower for SIMPLE IRAs than for 401(k)s.Still, SIMPLE IRAs have some advantages. the Simple IRA as of December 31 and start a new 401(k) plan on January 1. For the SIMPLE IRA, an employer who elects to make matching contributions may choose to reduce the amount to one that is less than 3% but no less than 1% for two out of every five years. Both the Simple IRA and SIMPLE 401K need employers to have less than 100 employees who have received at least $5,000 in compensation. On the other hand, an employer may include loans as a feature in a SIMPLE 401(k) plan. There are lower startup costs and operational costs for aa SEP-IRA compared to other retirement plans that would be considered “traditional.”#2. Because the SIMPLE IRA is an IRA-based plan, loans are not allowed. A few primary differences between a SIMPLE IRA and a SIMPLE 401 (k) are that loans and hardship withdrawals are permitted in a SIMPLE 401 (k). Mandatory employer contribution: Either matching contribution of up to 3% of employee's pay or contribution equal to 2% of employee’s compensation, even if employee does not contribute. (Quick reminder: A Roth 401(k) is funded with after-tax contributions in exchange for tax-free distributions in retirement.) A designated Roth account is a separate account in a 401(k), 403(b), or governmental 457(b) plan that holds designated Roth contributions. A traditional 401(k) plan is a qualified retirement plan offered by an employer to the employees. Stronger oversight : 401(k) plans have more oversight through the plan trustee, administrator, and advisor pertaining to fees, investment selection and employee education. Further, employers can contribute up to 25% of the employee’s contribution into their SEP IRA account with a $57,000 cap for 2020. 25% penalty on distributions made before age 59½ and within the first two years of participation in the plan. A SIMPLE plan can apply for both 401(k) and IRA plans. Traditional 401(k) Plans. There is no age requirement for the SIMPLE IRA. As a result, the two plans will require/allow different employer contribution amounts. October is the best time to consider converting a SIMPLE to a 401(k). If you are self-employed or a small-business owner, your options may not be limited to SIMPLE IRA vs. 401(k). There are a variety of retirement plans at your disposal. With a 401(k), employers are not required to make contributions, although many employers elect to make some type of matching contribution for participating employees. We want to hear from you and encourage a lively discussion among our users. Like SIMPLE IRAs, SIMPLE 401 (k) plans are only available for employers with 100 or fewer employees. It's a cheaper (and easier) plan for an employer … SIMPLE IRAs contributions work differently than SEP IRAs and 401 (k)s. An employer can either match up to 3% of an employee's annual contribution or set … Jane has decided to defer the maximum allowable amount of $13,500 ($13,500 for 2021, unchanged from 2020) to the plan.. , employers might prefer the SIMPLE IRA but optional for a 401 ( k ) plan ''. You visit a financial institution ’ s Terms and Conditions – both small and large Vesting rules for! Match plan for employees ( SIMPLE ) is worth considering rules Differ a... 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