The Difference Between a 401k and a Simple IRA

, | October 5, 2022 | By

Preparing for retirement involves a lot of moving pieces.

This makes sense: Your goals and plans for the future are unique to you, so you’ll need specific support to make everything happen.

What’s more: If you’re just getting started with retirement planning, the field can feel impossibly jargon-y, with abbreviations and acronyms left and right. Where are you to start? 

No worries – we’ve got you covered. Today, we’re talking about 401(k) plans, simple IRAs, and their differences so you can decide which retirement plan will work best for you! 


What’s a 401(k)? What’s a SIMPLE IRA? 

We’ll start with some concrete definitions: 


What is a 401(k)? 

A 401(k) is a retirement investment product you’ve likely heard of before: It’s one of the most common employer-sponsored retirement plans out there. 

Through a 401(k), employees agree to contribute a certain percentage of their paycheck to an investment account (typically roth and pre-tax). Then, the employer can match the employee contribution, either all or in part. 

There are a few different types of 401(k)s that employers can choose from, and employees enjoy some ability to choose how their money is invested. 

Seems pretty simple – but, as it turns out, there’s an option that’s even SIMPLEr than that! 


What is a SIMPLE IRA? 

As an alternative to a 401(k), a SIMPLE IRA is a retirement plan for small businesses – those with fewer than 100 employees.

SIMPLE stands for “Savings Incentive Match Plan for Employees.” Through a SIMPLE IRA, employers may contribute 2% of each employee’s salary OR a matching dollar-for-dollar contribution of the employee’s salary (up to 3%). 

As the acronym suggests, SIMPLE IRAs can be relatively easy to manage. For those businesses that qualify, SIMPLE IRAs may be a good option. Unfortunately, they aren’t without their drawbacks. 


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What’s the Difference Between a 401(k) and a Simple IRA? 

This can get complicated quickly, so we’ll provide some pros and cons about qualifying factors, benefits for employers and employees, and the types of situations in which each type of investment account can be used. 


401(k): Pros and Cons

  • Pro: A 401(k) can be offered by any employer. 
  • Pro: 401(k) plans don’t require employer contributions. 
  • Pro: 401(k) contribution limits tend to be slightly higher than alternatives like SIMPLE IRA plans. 
  • Pro: 401(k) plans tend to offer greater flexibility and more features to choose from.
  • Pro: Similarly, 401(k) plans offer varying plans and options to employees (e.g., vesting schedules, and automatic enrollment.) 
  • Con: 401(k) plans usually require more administrative oversight (and expenses). 

In addition, 401(k) plans can offer differing vesting schedules and rules for employer contributions.


SIMPLE IRA: Pros and Cons

  • Pro: SIMPLE IRA plans are simple. 
  • Pro: Available for smaller companies (eligibility requirements are low in general) 
  • Pro: Employer contributions vest immediately (and employees are 100% vested). 
  • Thing to consider: Employers must contribute to employee accounts. 
  • Con: There are steep tax penalties for early withdrawals
  • Con: Rolling funds over can be tricky and subject to strict rules


Lightning Round: The Main Differences Between 401(k)s and SIMPLE IRAs

  • SIMPLE IRAs are only for companies with 100 or fewer employees.
  • SIMPLE IRAs can be, well, simpler to manage.
  • 401(k)s can offer more flexibility for just about everyone involved. 

Which to use – and even when – may be a simple decision. 

For example, small companies may be well suited for a SIMPLE plan (and its lower administrative costs). On the other hand, if a small company seeks more comprehensive features and flexibility regarding a retirement plan selection, a 401(k) may be a better fit. (This last point may be especially prescient if an employer wishes to remain competitive within their industry.) 

However, making this decision can also be significantly more complex than you may think. Fortunately, this isn’t a calculation you need to make alone. 


Selecting Retirement Plans for Your Business Can Be Stressful. We’re Here to Help

When weighing the pros and cons of various retirement plan options, it can be frustrating to realize just how many factors are at play. 

It’s also crucial to acknowledge that there’s no one-size-fits-all plan. Your business’s size, the specific needs of your employees, and more will influence which retirement plan is the best fit for you. 

At BNC National Bank, we won’t make a one-size-fits-all recommendation. Instead, we’ll take the time to learn about your business goals, discuss which plan might be the best for you, and even help you make the process of implementing your retirement plan as streamlined as possible. 

Interested in learning more about the difference between a 401(k) and SIMPLE IRA – and, more importantly, which will be the most helpful for you and your employees? BNC is ready to help. Book a meeting with our team today! 

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