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SIMPLE IRA vs 401(k) Plan: 5 Differences to Consider When Switching Plan Types

Savings Incentive Match Plan for Employee (SIMPLE) IRA plans are, well, simple. They have lower fees and are easier to administer, making them an attractive choice for a small business’s first company-sponsored retirement plan. But simplicity often means limitations. By switching to a 401(k) plan, employers may be able to better leverage their plan to attract and retain talent while increasing their own contribution limits.

If you aren’t sure if you should switch from a SIMPLE to a 401(k) plan, here are five differences to consider when weighing your options.

P.S. - If you’re new to offering a company retirement plan, check out this article first which outlines different plan types.

  1. Contribution Limits. A common reason small businesses offer a company plan in the first place is because they want to open their own retirement account, so higher contribution limits are often an attractive quality for not only employees but also business owners themselves. With SIMPLE plans, the max contribution is $13,500 ($16,500 for those 50 or older), while 401(k)s allow for a much larger contribution limit of $19,500 ($26,000 for those 50 or older).
  2. Employer Contribution Options. One big difference between SIMPLE and 401(k) plans is flexibility around employer contribution rules. For SIMPLE plans, employer contributions are mandatory and all contributions are immediately vested. 401(k)s, on the other hand, do not require employer contributions and the employer has considerable discretion about how long a worker must be employed before their employer contributions are vested.
  3. Employee Contribution Types (Pre-Tax Versus Roth). SIMPLE plans only allow for pre-tax contributions, while 401(k)s allow for both Roth and pre-tax contributions. Roth contributions allow employees to pay taxes now on contributions so they don’t have to pay taxes on them when they are withdrawn during retirement. This can be an attractive option for some employees depending on their taxable income and specific financial situation.
  4. Option to Include Loans and Hardship Distributions. SIMPLE plans don’t allow for loans (the ability to borrow funds against your plan) or hardship distributions (the ability to withdraw emergency funds), while 401(k)s allow for both of these features to be included in the plan design. So while participants are generally encouraged to not tap into their account early, the ability to do so can understandably be an important option for employees.
  5. Company Size. SIMPLE plans are specifically designed for small businesses, which is why these plans are only available to businesses with less than 100 employees who earn at least $5,000 in compensation during the year. 401(k) plans do not have such a limit, so if your company is approaching 100 employees, or will be soon, it may be time to consider other plan options.

Set up your affordable, flexible retirement plan today.

Act Soon: The Deadline to Notify Your Employees is November 2nd

If you’re ready to change your SIMPLE plan to a 401(k) plan, be aware of the timelines. You can only amend or change your plan at the beginning of the year (January 1) and you must provide employees 60 days in advance of terminating a SIMPLE IRA. That means, you must inform your employees of any changes by November 2nd. We recommend reaching out to your plan advisor or tax consultant for more information and to help you determine what makes the most sense for you and your business.