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Simple IRA vs 401(k)

November 20th, 2017 | Written by

401(k) and Simple IRAs are both tools to help you prepare you for retirement. When choosing between an IRA or a 401(k), there’s a lot of factors to consider. Take a look at the table below to learn the differences!

IRA vs. 401(k)

Feature Simple IRA 401(k)
Eligible Employer Employers who on any day during the preceding year have 100 or fewer employees earning $5,000 or more in compensation. No other plan may be maintained at the same time. Any business regardless of size.
Establishment Deadline October 1 of current year (or later if business is established after October 1). Last day of Employer’s tax year (must be established by October 1 if Safe Harbor plan).
Eligible Employees Employees who receive $5,000 in compensation in any two preceding years and are expected to receive $5,000 in the current year are eligible. These requirements may be less restrictive. No minimum age limit permitted. Cannot exclude employees who exceed: 21 years of age, and have completed one-year (12 months) of service with 1,000 hours per year. These requirements may be less restrictive.
Contribution Limits – Employer Employer must make matching contributions of 100% up to 3% of employee compensation or contribute 2% of total eligible employee compensation. $275,000 of compensation is considered for employer contribution purposes. Employer contributions are not mandatory (unless Safe Harbor plan). Employer can make discretionary contributions up to 25% of eligible payroll. Can be made as a Matching or Profit Sharing contribution, up to $55,000 per employee (2018 limit). Safe Harbor contributions can be made as either a Match of 100% on first 3% of pay deferred, plus 50% on next 2% of pay deferred (maximum Match of 4% of pay) or 3% of total eligible employee compensation.
Contribution Limits – Employee Employees can defer up to $12,500 per year (2018 limit), or 100% of compensation, whichever is less. Employees who are age 50 or older can defer an additional $3,000 (2018 limit). Employees can defer up to $18,500 per year (2018 limit), or 100% of compensation, whichever is less. Employees who are age 50 or older can defer an additional $6,000 (2018 limit).
Deductions & Deferrals Employer contributions deductible to Employer, and tax deferred for Employee. Employee contributions are pre-tax, tax deferred. Employer contributions deductible to Employer, and tax deferred for Employee. Employee contributions are pre-tax, tax deferred or can be made as after-tax Roth contributions.
Roth Contributions Permitted Not permitted. Permitted.
Vesting of employer contributions 100% Vested immediately. Several permissible vesting schedules for Profit Sharing or matching contributions, up to 6-year graded. Safe Harbor contributions 100% Vested immediately.
Loan Provisions Not permitted. Permitted up to IRS limits, if elected by Employer.
Testing No testing required. Subject to ADP/ ACP testing for 401(k) contributions (unless Safe Harbor), 401(a) testing for Profit Sharing, and Top Heavy testing.
IRS Reporting No reporting required. Form 5500 due each plan year.
Distributions 10% premature distribution penalty may apply; penalty is increased to 25% during first 2 years of participation. Must begin distributions at age 701/2. In-service distributions allowed. 10% premature distribution penalties may apply. Must begin distributions at age 701/2 if a 5% or more owner; can delay until retirement if not an owner. In-service and hardship distributions available.

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The Prosperity Consulting Group registered as a Registered Investment Advisor (RIA) in 2005. We have with a passion for providing clients with objective investment advice and wealth management solutions. Our purpose, coupled with our fiduciary commitment, is essential in helping clients achieve their financial goals. Our firm is dedicated to providing unparalleled financial planning and investment advice to individuals, families, businesses and institutions. We have identified key areas that are critical and integral to a client’s financial success. These planning areas encompass: Investment Planning & Management Retirement Planning Estate Planning Tax Planning Business Planning Insurance Planning Income Protection & Asset Preservation Education Planning 401(k) Planning
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