Q:

What are the small business advantages of a SIMPLE IRA vs. a 401(k) plan?

A:

Quick Answer

The main advantage of a SIMPLE IRA is that it gives employers more flexibility with matching contributions. The two plans are largely similar, and both are easy and inexpensive to maintain; they only differ in a few features, notes Investopedia.

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Full Answer

Both plans require employers to have no more than 100 employees who have received a minimum of $5,000 in compensation over the last year, and both plans allow employers to make the same kinds of contributions, explains Investopedia. Employers making matching contributions contribute equally up to 3 percent of compensation, and those making non-elective contributions contribute up to 2 percent of compensation.

With a SIMPLE IRA, employers can have no other retirement plans, except for employees covered by a collective bargaining agreement; they cannot offer loans as a feature of the plan, and only non-elective employer contributions are subject to the compensation cap. Additionally, employers making matching contributions can reduce the amount to below 3 percent, but not below 1 percent, for two out of every five years. With a SIMPLE 401(k), employers can maintain another plan for employees not eligible to participate; they can include loans as a feature of the plan, and all their contributions are subject to the compensation cap, according to Investopedia.

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