Simple IRA (Individual Retirement Account) v/s Simple 401k Retirement Savings Accounts

In this article, we will compare the differences and similarities between the Simple IRA v/s Simple 401k Retirement Savings accounts. While they are quite similar, they have many differences as well.

Contributions to Simple 401k & Simple IRA Plans

The following table shows the yearly contribution limits that an employee can make towards both his Simple IRA and Simple 401k account. On top of the normal contributions, employers are allowed to make Employer-Matched Contributions of upto 3% of the Employee's Compensation. For example, if an employee makes $50,000 a year, the employer is allowed to make an extra $1500 (3% x $50,000) contributions on behalf of the employee.

Any employees who are 50 years and older can make additional 401k catch up contributions.

Employer Contributions to Simple 401k & Simple IRA

Employer contributions to a Simple 401k & Simple IRA account are subject to different rules. For example, Simple 401k accounts are subject to a Compensation Cap of $245,000 per year for the year 2010. The below example will clarify this:

XYZ Corp. offers both the Simple 401k and Simple IRA retirement packages to its employees and makes a 3% Employer-Matched Contributions. James is an employee who earns $300,000 a year Gross Wage.

From the table above, you can conclude that employer-matched contributions of 3% to a Simple IRA account holder are eligible 100%. However, they are limited to a compensation cap of $245,000 for Simple 401k Account Holders. The reason behind this? Don't ask why!

Eligible Employees

- To participate in a Simple 401k plan, employees must be over the age of 21 and must perform atleast 1 year of employment work. On the other hand, there is no such requirement to be eligible to participate in a Simple IRA account.

- Some employers require you to make a minimum gross wage of $5000 in order to be eligible to participate in a Simple IRA account.

Availability of Loans

- Employees are not allowed to take out loans from a Simple IRA account.

- Employees ARE allowed to take out 401k loans from Simple 401k accounts.

Vesting of Retirement Accounts

- All contributions made towards a Simple IRA and Simple 401k account are immediately vested 100%. Go here to read more about 401k vesting.

Eligible Employers

- Employers who want to offer both the Simple IRA and Simple 401k retirement packages must have less than a total of 100 employees who have a minimum gross wage of $5000 per year.

- Employees who are participating in a Simple 401k plan are not allowed to participate in any other retirement plans offered by the employer. Likewise, the employer is NOT allowed to offer any retirement plans if he is already offering a Simple 401k plan to those employees.

- However, the employer is allowed to offer other 401k retirement plans to those employees who are NOT eligible to participate in Simple 401k Plans.

- An employer who offers a Simple IRA plan is NOT allowed to offer any other type of retirement plan package.