When you’re choosing a retirement plan for your workplace, there’s a lot to figure out. For example, what’s the difference between a SIMPLE IRA and a 401(k)? We’re here to help, so let’s take a look.
What Is a SIMPLE IRA?
A SIMPLE IRA is a Savings Incentive Match Plan for Employees, which means employees put a portion of their salaries directly into a retirement account. The employer either matches the contribution or pays a flat contribution to all employees.
2021’s maximum contribution is $13,500, and employers can choose to match these contributions up to 3% or give each employee a flat 2% of the employee’s pay. The total limit in 2021 is $285,000.
What Is a 401(k)?
With a 401(k), employees put some of their income—up to $19,500, based on 2021’s contribution limit—into a qualifying investment account. Employees over 50 can make catchup contributions and put up to $26,000 into their 401(k)s. All the money someone puts into their 401(k) is tax deductible, but it will be taxed when they withdraw the money for retirement. Some 401(k)s involve the employer matching contributions, with limits to the amount that can be matched.
The SIMPLE IRA makes a lot of sense for small business-owners and the self-employed. The SIMPLE IRA is less flexible than a 401(k), but it’s easier to administer and use. It comes with the requirement of having fewer than 100 employees, so your business needs to be small. The 401(k) works for any employer regardless of company size.
Employees must be allowed to use their employer’s 401(k) plan if they are 21 or older and have at least one year of service. Employers can choose to offer a 401(k) to employees younger than 21 and employees who are newer to the company, but they must offer it to workers who meet the above requirements.
The SIMPLE IRA’s requirements are different. Employees are eligible for this plan if they have received $5,000 or more in compensation during either of the past two years and expect to receive at least $5,000 in the upcoming year.
Offering a retirement plan is not legally required, but it’s an excellent way to motivate your employees. Now that you know the difference between a SIMPLE IRA and a 401(k), you can decide which is right for your business.