A Comparison of a SIMPLE IRA Vs. A 401(k) for Businesses

By Srikanth

ira vs 401k

If you’re an employee running your own company, or a sole proprietor, you might wonder about the differences between a SIMPLE IRA and a 401(k) for businesses. Independent contractors and small business owners commonly open both tax-advantaged retirement plans as an added way to save for retirement. A 401(k) is generally more complicated for small businesses to set up than a SIMPLE IRA. However, if you are eligible to get financial compensation from your company, then you can’t have both plans simultaneously. In this article, we’ll compare the differences between these two retirement plans to make the decision that best suits your needs as an entrepreneur.

 

What is a SIMPLE IRA?

 

It is a retirement plan for independent contractors and small businesses. A SIMPLE IRA plan is set up by an employer, and participants in the plan make contributions from their after-tax income. A SIMPLE IRA is a tradable investment account that includes stocks, mutual funds, ETFs, and other investment choices. Your contributions to a SIMPLE IRA grow tax-free until you withdraw the money in retirement. The contributions to a SIMPLE IRA are limited to $13,000 per year and $13,500 for those aged 50 or over.

 

A 401(k) plan for businesses

 

A 401(k) plan is a common way for employees to save for retirement. It is a type of defined contribution plan that allows employees to make pre-tax contributions to an account and get a matching contribution from their employer. This can help small business owners save for retirement while lowering their income tax payments. Large companies typically offer 401(k) plans, but some small businesses can also offer a 401(k) plan. If you are an employee working for a small business, you can also open a 401(k) plan for your company. There are certain criteria to follow for employees who want to open a 401(k) for their company, such as contributing a certain percentage of your income and setting up the plan for your company. A 401(k) plan might be a good option if you are self-employed because you can contribute more than you would to a SIMPLE IRA.

 

How to set up a 401(k) for your business?

 

Are you an employee who wants to open a 401(k) for your business? You need to make sure that your company meets certain criteria. The company must have at least $100,000 in annual gross revenue and should have employees eligible to take part in the plan. If your company has an enrolled retirement plan, you can’t open another retirement plan. Before you open a 401(k) for your small business, you must ensure that you are eligible to participate in the plan. After you’ve confirmed that the plan meets the requirements, you can set up a 401(k) for your business. To set up a 401(k) for your business, you have to fill out the plan document and choose the investment options for the plan. You also need to ensure that the company is contributing to the plan on behalf of the employees.

 

Also, sign up for a retirement account for your company if one is offered. You can set up a traditional or Roth IRA if you are self-employed. You might also want to consider a Health Savings Account (HSA) if you have a high-deductible health insurance plan. You can put up to $18,000 per year in an HSA if you have a family plan or $6,500 per year if you are single. Even if you do not have high-deductible health insurance, you may be able to participate in an HSA if you receive insurance from your company.

 

Why Should a Small Business Open a SIMPLE IRA?

 

As a small business owner, you could choose between a 401(k) and a SIMPLE IRA. Independent contractors and small business owners commonly open both tax-advantaged retirement plans as an added way to save for retirement. You might want to consider opening a SIMPLE IRA if you are self-employed and want to contribute more to your retirement savings than you would with a 401(k). If you are self-employed, you can contribute up to $18,500 to a SIMPLE IRA and $19,000 if you are older than 50. You can also contribute up to 25% of your net earnings from self-employment. If you earn $100,000 or more and are an employee, you can contribute up to $19,000 to a 401(k), or $25,000 if you are 50 or older.

 

Key Differences Between a SIMPLE IRA and a 401(K)

 

While all of these plans offer some degree of tax savings, SIMPLE IRAs have lower contribution limits than other retirement plans: let's compare the current limits for the year 2018: To contribute to a SIMPLE IRA, you must be under age 50 and have an employer who offers this plan. SIMPLE IRAs have a fixed contribution rate, but they also have a low maximum deduction limit.

 

When it comes to a 401(k) plan, you must be 18 or older and have an employer who offers this plan. 401(k) plans also have a fixed contribution rate but a higher maximum deduction limit.

 

While 401(k) is a defined contribution plan, a SIMPLE IRA is a defined benefit plan. A defined contribution plan means that the amount you contribute to the plan is limited, while a defined benefit plan determines the benefits you get based on the amount you’ve contributed to the plan. You have to make contributions to a 401(k) regularly, while a SIMPLE IRA lets you contribute one lump sum or make monthly contributions. You can contribute more to a SIMPLE IRA than a 401(k). Your contributions to a SIMPLE IRA grow tax-free until you withdraw the money in retirement, while contributions to a 401(k) are made with pre-tax dollars.

 

What are the similarities between a SIMPLE IRA and a 401(k)?

 

A SIMPLE IRA is very similar to a 401(k) in many ways. In fact, the term “SIMPLE IRA” is often used interchangeably with “401(k).” A SIMPLE IRA and a 401(k) are both types of retirement plans that both employees and self-employed individuals can open. Both plans have contribution limits. You can open a 401(k) for your business, but you can’t have a SIMPLE IRA and a 401(k) simultaneously.

 

1. Pros of opening a 401(k) for your business

 

It is a very convenient way to save for your retirement. It can be accessed through your workplace, so there is no need to transfer your money to another account. You can start any time and contribute as much or as little as you want. You can also opt to receive your contributions as a percentage of your salary. The funds are invested in various assets, such as stocks and bonds, so there is some diversity in your retirement savings. It is a very simple and convenient way to save for retirement. No maintenance and operational costs are associated with setting up a 401(k) plan. It allows your employees to save for retirement through a tax-advantaged plan.

 

2. Cons of opening a 401(k) for your business

 

While opening a 401(k) is fairly simple, there are a few drawbacks to consider while considering this option. First, there are costs associated with opening and maintaining a plan. Depending on your company's plan, costs can range from a few hundred dollars a year to several thousand dollars a year. Depending on the company size, the costs of opening a plan may not be worth the benefits.

 

Second, there are restrictions on how much employees can contribute to a 401(k). For example, if an employee receives a salary of $40,000 yearly, they cannot contribute more than $19,000 to their 401(k). This might be an issue for small businesses that may have a few employees who make more than $19,000.

 

Final Thoughts

 

A 401(k) is generally more complicated for small businesses to set up than a SIMPLE IRA. Self-employed individuals might want to consider opening a SIMPLE IRA because you can contribute more than you can to a 401(k). The decision between a SIMPLE IRA and a 401(k) is a personal one. It comes down to how much you can contribute and when you want to make the contributions. You can also open both plans if you are eligible to get financial compensation from your company. Visit Stockprices.com for more information on finance and trading.