401(k) and SIMPLE IRA 

Whether you’re just checking to confirm your choice of a retirement plan or looking to set one up, the kind of plan you pick could have a substantial impact on the finances of everyone involved in your business. Do you stick with a traditional 401(k) or opt for a SIMPLE IRA?

Regardless of which one of these you select, you know that it’ll give your company a more competitive advantage and boost employee satisfaction. While there are various plans that can enhance your benefits package, the two most common are 401(k)s and SIMPLE IRAs (individual retirement account). Learn more about these options to put together a benefits package that will best suit your organization.

All About the 401(k)

With more than 60 million people configuring a 401(k) for themselves, it’s easy to see why they’re the most popular way to gradually generate passive income. 401(k) plans offer a tax-advantaged way to save for retirement, making it easier for you to secure your future.


A traditional 401(k) allows you to enjoy deferred taxes on your investment gains and your earnings are taxed only when they come out of the account. That means you can avoid taxes on earnings, such as capital gains and dividends until you withdraw them at retirement.


Some of the most important features of 401(k) plans include:

  • Tax-deductible contributions for employers, based on IRS limits

  • Maximum annual contributions of $20,500 (for 2022), with an additional $6,500 catch-up contribution for those who are age 50 and older

  • Potential for employer matching contributions, with the employer kicking in extra money based on employee contributions

  • Freedom to establish vesting terms - which allows employers to establish what percentage of the contributions an employee owns over certain periods of time

Should You Select a SIMPLE IRA Plan?

A SIMPLE IRA, also known as a Savings Incentive Match Plan for Employees, lets smaller companies provide their employees with retirement benefits. SIMPLE IRAs are ideal for small business owners because they lack the reporting requirements and the associated paperwork that’s required for many other workplace retirement plans, like 401(k)s.


Earnings saved in a SIMPLE IRA can be invested in a wide variety of different securities and funds, and since it’s a tax-deferred account, you won’t have to pay capital gains taxes when you buy and sell different investments inside your account. Withdrawals in retirement, however, are taxed as normal income and SIMPLE IRAs are not available as Roth accounts.


Key features of SIMPLE IRAs include:

  • Available to small businesses with 100 employees or fewer

  • Contribution limits of $14,000 ($17,000 for people age 50 and older) for 2022

  • You can rollover SIMPLE IRA retirement funds into another SIMPLE IRA tax and penalty free at any time.

  • Requires employers to make contributions on behalf of their employees, either a matching dollar-for-dollar contribution of up to 3% of their employee’s compensation or a non-elective contribution of 2% of the compensation of each eligible employee

  • Employer contributions may be deductible on business tax returns.

SIMPLE IRA vs. 401(k)

For employers, a SIMPLE IRA requires less administrative work with fewer compliance requirements, including no annual tax reporting, and lower associated fees than a traditional 401(k). It is also easier to set up without the assistance of a third party. However, employer contributions are mandatory and immediately vested to the employee and employee contribution limits are slightly lower than 401(k) limits. In addition, employee fees to withdraw funds before the age of 59.5 and within two years of participation are much higher than in a 401(k). Employees are also not permitted to take a loan from their account.

Since 401(k)s do not require employer contributions, those that do offer them can set a vesting schedule gradually ceding ownership to employees. Therefore, even if employees were to leave before their contributions are fully vested, they only get a portion of the employer contribution, making this an attractive offer to long-term employees. Depending on the plan, employers may also allow employees to temporarily access their earnings in the form of a loan from their account. This can come in handy when needing to access funds for a big purchase or in cases of emergency situations. However, there are more administrative and tax filing requirements involved and setup costs and plan fees are higher than that of SIMPLE IRA plans.

Can You Contribute to a 401(k) & a SIMPLE IRA in the Same Year?

It is generally an uncommon practice to contribute to both a 401(k) and a SIMPLE IRA in the same year unless you work for two different companies simultaneously. An employer cannot offer both at the same time, so consequently, the only other way to contribute to both a 401(k) and a SIMPLE IRA is if you change employers during the year. Although not common, it is also possible for an employer to switch from one type of plan to another during the year.

Which Plan is Best For Your Company’s Benefits Package?

If you’re an employer with 100 or fewer employees and want to provide a retirement benefits option, a SIMPLE IRA can be a solid choice to meet your employee’s needs without some of the paperwork, compliance and reporting requirements, and operating costs that come with a 401(k) program. If you are willing to invest in attracting longer term employees, while providing your business with potential tax savings and contribution flexibility, a 401(k) may just be the right option for you.

It’s important to review your options and consider what best meets the needs of both your company and your employees. Our payroll and broker team can help you design and manage a custom employee benefits package, including a retirement benefits plan, made to fit your distinct business goals.
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*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*

  • Last Modified
  • June 19, 2023

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