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. |