Simple IRA vs. 401(k) — Which Is Right for Your Business?

According to new data from Fidelity Investments, the volatile market in 2022 saw a large share of investors who had at least $1 million in their IRAs and 401(k) funds shrink by almost 30 percent compared to 2021.

And while the number of retirement millionaires keeps dropping, it isn't all bad news for investors who have chosen to invest in these retirement funds.

So, we decided to explore both investment options to compare the Simple IRA vs. the 401(k) so you can find out what’s best for you.

We’re all faced with tough decisions in life but deciding between the Simple IRA or the 401(k) is a choice of simplicity versus flexibility for employers.

So, what’s the difference? A Simple IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement plan sponsored by a broker for small businesses with fewer than 100 people. They’re similar to traditional IRAs and easier to set up and administer than 401(k)s, but small businesses tend to lean towards Simple IRAs.

A 401(k) plan is a retirement savings plan sponsored by your employer that’s made up of pre-tax dollars. You’ve got the option of the traditional 401(k) and a Roth 401(k). 401(k) plans have larger contribution limits than IRA plans.

So, what are the advantages and disadvantages of a Simple IRA vs. a 401(k)? A Simple IRA offers tax deferred savings, it’s easier to run, gives tax credits for employers and employee contributions, offers multiple investment choices, and it isn't subject to .

There are some drawbacks to a Simple IRA too like no Roth option, low contribution limits, and high penalties for non-qualified withdrawals.

The advantages of a 401(k) include the ability to make contributions on a pre-tax basis, some employers may match contributions, higher contribution limits, there isn't an age limit on making contributions, and it can act as a tax shelter.

The disadvantages of a 401(k) include age requirements for withdrawals, mandatory withdrawals (RMDs) after a certain age, and limited broker and investment options.

One of the reasons to offer an employer-sponsored is to attract and keep good employees, and if you offer higher salaries, you’ll want to invest in a more expensive plan. A 401(k) is great because employees with higher salaries put more money away for retirement, and if you offer a flexible matching contribution, you could save more versus a Simple IRA.

If your salaries are lower, a Simple IRA is perfectly fine. While the contribution limit is high compared to other options, it's cheaper to set up and administer. If a Simple IRA can meet your employees' needs, it’s a much better choice for your business, but if you want more flexibility and higher contribution limits, go with a 401(k).