Is SIMPLE IRA Or 401K Better for Your Small Business?

Is SIMPLE IRA Or 401K Better for Your Small Business?


In setting up a retirement plan for a company, business owners may go back and forth in deciding between a SIMPLE IRA (Savings Incentive Match Plan for Employees) and a 401k plan. Both have their benefits and potential risks. So, which is the better option for your business?

What Are The Differences Between a SIMPLE IRA And a 401k Plan?

According to plan provider Ubiquity, while there are similarities in each plan structure, there are important key differences in contribution limit, number of employees, tax considerations, employer contribution, loan access, and setup/maintenance that should be considered by every employer when he or she is considering implementing a retirement plan. Note that the following is not an exhaustive list of the differences between the two plans, but is intended to provide general guidance.

  • Contribution Limit. In a SIMPLE IRA plan, contributors under 50 years old have a limit of $13,500 for 2021. This is compared to a 401k contribution limit of $19,500 for 2021. For earners 50 years of age and older, the limits are $19,500 and $26,000 for a SIMPLE IRA and a 401k respectively.
  • Number of Employees. A SIMPLE IRA can only be used for businesses with 100 or fewer employees, while a 401k can be used for businesses of any size.
  • Tax Considerations. With a SIMPLE IRA, there is a two-year period where you cannot remove funds from the plan and roll them into a Roth IRA, lest you face a 25% penalty. Conversely, with a 401k plan, you have control over whether taxes are paid (the option is to pay taxes when funds are withdrawn in retirement or utilize Roth 401k. The choice between these two options will be largely dependent on the individual contributor.)
  • Employer Contribution. SIMPLE IRAs require employers to match or implement non-elective contributions for all employees. A 401k plan allows employers to decide whether they will match contributions or not.
  • Loan Access. The main difference as related to loan access is that with a SIMPLE IRA, contributors are unable to take a loan from retirement savings (unless they are ok with incurring a penalty), while 401k plans allow contributors to take loans if necessary.
  • Setup/Maintenance. SIMPLE IRAs are generally seen as less complicated and expensive in terms of setup and maintenance as compared to a 401k. This is due in part to the fact that the IRS imposes non-discrimination tests on many 401k plans, which can be costly and time consuming. SIMPLE IRAs do not have testing requirements.

Which Option Is Best for My Business?

 Every business will have its own unique needs when it comes to retirement plans. It’s important that business owners closely analyze their company setup to determine the number of employees, the business’s financial status, and how these factors may affect their final decision.

In general, a 401k plan will offer more flexibility and typically will result in greater value both for employers and employees. However, if you run a very small company, you may consider the “easier” option of a SIMPLE IRA. It is a good idea to discuss your individual business needs with a financial professional before making any decisions about a retirement plan.