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Is it Time for your SIMPLE Plan to Grow Up?

Is it Time for your SIMPLE Plan to Grow Up?

September 24, 2021

Business owners listen up, November 2nd of every year is the deadline to switch your company from a SIMPLE IRA plan over to a 401(k) plan for the following year. A SIMPLE IRA plan is designed specifically for smaller businesses to use over the traditional 401(k) plan, but when the two are compare side by side the 401K benefits far out way the SIMPLE IRA benefits, no matter the size of the company. In this blog post, we have broken down each plans characteristics in regards to a few very important retirement account features such as contribution limits, Roth options, investment options and more. We will compare both plans side by side and make it very clear which is best for the employer and the employee.

Contribution and limits 

One of the most important characteristics of a retirement account is the ceiling placed on it, being able to contribute a lot of income into the account is very crucial to how quickly and how big it will grow.   The SIMPLE IRA as of 2021 has a $13,500 limit for those under 50 and a $16,500 limit for those 50 and over. Meanwhile the 401(k) in 2021 has a limit of $19,500 under 50 and $26,000 for 50 and over. That is a $6,000 a year difference over 30 years that is $180,000 more of income that can be contributed, but that is even before accounting for the investment side of the equation. Consider both the SIMPLE IRA and the 401(k) receive the full contribution limit respectively over 30 years, and assume they both receive an average yearly return of 8%. At the end of 30 years the SIMPLE IRA would be at $1,529,323 while the 401(k) would be a $2,209,023! That is a difference of $679,700! The clear winner here if the 401(k)

SIMPLE IRA                                                                             401(k)                                 

Contribution limit: $13,500                                                                                                              Contribution limit: $19,500 

Contribution limit 50 and over: $16,500                                     VS                  Contribution limit 50 and over: $26,000

30 year return with avg. 8% growth: $1,529,323                                                                              30 year return with avg. 8% growth: $2,209,023

Roth Options

Another big difference between the two accounts is the Roth options for each. With a traditional 401(k) there is the option to put income into a Roth account, this money is taxed right away before going into the account, when the money is taken out later in life, it is tax free. This is a huge bonus for employers offering the 401(k), as it provides flexibility for themselves in employees on how they want to invest their money. The SIMPLE IRA does not have a Roth option and thus employer and employees are forced to invest their money in the traditional way, being taxed when they withdraw funds in retirement. Chalk up another win for the 401(k).

SIMPLE IRA                                                                             401(k)                                Roth Option? NO                                                        VS                                                Roth Option? YES

Investment Options

With a 401(k) the investment options available to employers and employees, based off the chosen options by the employers and the planner helping the company, this means there could be many, many different and unique choices for each individual to invest in, based off their goals and wishes. The SIMPLE IRA is run by a financial institution like mutual fund companies, so the choices of investments are limited to what that institution has available such as their own mutual funds. The freedom that comes from being able to line up your money goals and life goals by being able to choose the best investments for yourself is a big bonus for 401(k) users over SIMPLE IRA users. 

SIMPLE IRA                                                                                                   401(k)            Investment Options: Limited options                         VS                   Investment Options: More robust, plethora of choices

Features and Technology Included 

One of the best parts about modern day investing is all the information and resources provided to investors via websites and apps to help keep track of their investments and make sure they are still on track. Several popular 401(k) providers come with free to use software that has many, many features for users that make it easy to understand the complexities of investing for their future. Some of these apps include interactive charts and diagrams that represent real time movement of funds and the market throughout the day and beyond. Quick access to all the available funds for investors are just clicks away, and there is always educational courses to take and people ready to take your questions on the other end of the phone or computer screen. This is another short coming for SIMPLE IRA's as they normally come with bland, cookie cutter progress reports that typically do not inform the investor of much at all, other than the most recent performance of their investments. The easy to use and reliable tech that comes with most 401(k) plans is a big time advantage over the SIMPLE plans.

 SIMPLE IRA                                                                                   401(k)                         

Provides simple, usual reports and little features                           VS                                      Provides unique features for every investor

The time to switch your SIMPLE plan to a 401(k) is now! Give us a call at 417-860-5678