Simple IRA v/s Simple 401(K)

IRA and 401(K) are the most critical ways of having a steady income in your days of retirement. Most Americans opt for these plans to insure their future against any uncertainties. Hence, as an employer or employee it is very critical to choose the right plan. Though both the plans have certain common features, the differences too, are notable.

Employer Eligibility

If you already have a Simple IRA plan then you cannot have any other plan. So if you are still in the process of setting your IRA plan, ensure that your plan covers all the employees you want to get covered. Also if you have a large organization with 100 or more than 100 employees earning more than $5,000 annually, then you can’t set up Simple IRA or Simple 401(K) plan.
Both the above rules have certain exceptions. But those primarily take into account certain rare events like merger and acquisitions. Hence in your case, if its a normal situation, you can consider the above 2 conditions applicable to you.

Employee eligibility

For any employee to avail benefit of Simple IRA or Simple 401(K) plan, his/her age should be at least 21. Plus you should have been in employment for at least a year to join the IRA or 401(K) sponsored by the employer. You annual income should be at least $5,000.

Establishing the plans

Both Simple IRA and 401(K) plan should be established before October so that it can be used in that financial year.


Employees can make their eligible amounts of contribution anytime before the end of the financial year. In both, employers can make same amount of contributions like the employees. However, employer’s contribution should not exceed 3% of employees compensation in Simple IRA.

However, in Simple 401(K), this rule is further subject to an income limit of USD 220,000. Say an employee has a compensation of $400,000 and has a Simple IRA. Say his/her own contribution is $12,000. Then the employer can match up this contribution as 3% of $400,000 is equal to $12,000. However, if he/she has a Simple 401(K), then the employer contribution is limited to 3% of $220,000 which is $6,600 (considerably lower than the Simple IRA employer contribution).

All contributions are immediately forfeited to the employees. Simple 401(K) doesn’t have a provision for employers to make lesser contribution. However, in Simple 401 Individual Retirement Account (IRA) plan, employers can reduce contributions to as low as a per cent of the employee contribution. However, the employer can’t do low contributions throughout the tenure of employee’s service. He/She can do so only 2 times in a period of 5 years.

Using the plans

Often employees need to use the accumulations of plan. There could be some urgent need for money for a short time. Simple 401(K) plan can prove to be of real help under such circumstances. You can take a loan from your Simple 401(K). However, you cant do so from your Simple IRA.

So before you set up a retirement plan or join one, keep above points in mind and evaluate the plan accordingly. Remember, the retirement plan single handedly plays a crucial role in deciding how you will spend the last few years of your life.