SIMPLE IRA vs. 401(k): How They Differ - And Can You Have Both?

When you’re trying to decide what type of retirement plan to contribute to (or start, if you have a business), it’s important to carefully consider what’s likely to work for you.

Two common retirement plan choices are the Savings Incentive Match Plan for Employees (SIMPLE) IRA and the 401(k). Here’s what you need to know about the SIMPLE IRA vs. 401(k) so you can make the best decision for you.

SIMPLE IRA vs. 401(k) comparison chart

As you compare these retirement plans, and begin using them as you learn how to invest money, consider this SIMPLE IRA vs. 401(k) comparison chart to get a quick overview of what to expect in terms of taxes, contributions, and eligibility requirements.

	SIMPLE IRA	401(k)
Tax on contributions	No	No
Tax on withdrawals	Yes	Yes
Mandatory withdrawal age	72	72
Early withdrawal penalties	10% 25% for withdrawals made within two years of first contribution	10%
Loans	No	Depends on employer
Income limits	No	No
Contribution limit (for tax year 2023)	$15,500 ($19,000 for those 50 and older)	$22,500 ($30,000 for those 50 and older)
Contribution limit (for tax year 2024)	$16,000 ($19,500 for those 50 and older)	$23,000 ($30,500 for those 50 and older)

SIMPLE IRA: the basics

A SIMPLE IRA plan can be a way to save pre-tax dollars for retirement down the road. In general, a company can’t offer both a 401(k) and a SIMPLE IRA. If you’re a small business owner who wants to offer retirement benefits, a SIMPLE IRA can be relatively easy to set up and administer. However, per IRS requirements, you must have 100 or fewer employees in order to use a SIMPLE IRA. A SIMPLE IRA is also a retirement plan for the self-employed, even if you don’t have employees.

It’s also important to note, as a business owner, that a SIMPLE IRA requires some level of contribution to eligible employees. You have two options for employer matching. You can make dollar-for-dollar match contributions of between 1% and 3% of your employee’s contributions, or elected salary deferrals. Or you can make a non-elective contribution of 2% of your employees’ compensation, regardless of whether the employee contributes. When offering a 401(k), you aren’t required to make contributions to employee retirement accounts.

From an employee standpoint, a SIMPLE IRA is very similar to a traditional 401(k). You make employee contributions before taxes are taken from your paycheck, and the money could grow tax-deferred until you withdraw from your account. Remember that growth isn’t guaranteed and all investments come with the risk of loss. Withdrawals are taxed at your marginal tax rate when you pull them out of your account in retirement.

It’s also important to note that a SIMPLE IRA also comes with required minimum distributions (RMDs) beginning at age 72 — just like a traditional 401(k). One important difference, though, is that employer contributions are required for a SIMPLE IRA, whereas employers don’t have to make 401(k) contributions.

On top of that, an employer that does offer a match doesn’t have to immediately vest those contributions, which means an employer 401(k) match might not belong to the employee until a certain set of conditions are met. There is no vesting schedule with a SIMPLE IRA, and employer contributions are immediately vested and accessible for the employee.

A SIMPLE IRA has a similar early withdrawal penalty of 10% on top of any income taxes owed if you take money prior to age 59 1/2 — as with the 401(k). However, a SIMPLE IRA also comes with an additional penalty if you take early withdrawals within two years of beginning account contributions. That penalty becomes 25% if you withdraw early on.

You also can’t take a loan from a SIMPLE IRA, whereas your employer’s 401(k) plan might have a loan plan.

One of the biggest differences between a SIMPLE IRA vs 401(k), though, is the annual contribution limit. For the 2023 calendar year, you can contribute up to $15,500 to a SIMPLE IRA, or $19,000 for those 50 or older. These limits increase to $16,000 and $19,500 in 2024. 

The contribution limit is higher with a 401(k), with $22,500 as a limit for 2023 or $30,000 for those 50 and older. In 2023, the limit is $23,000 or $30,500 for those 50 or older.

Note that your combined contributions to a SIMPLE IRA and a 401(k) can only reach the contribution limit for the 401(k). If you have a SIMPLE IRA and contribute $13,000, and then switch jobs mid-year to a company with a 401(k), you’ll only be able to add $10,000 to the 401(k) for the remainder of the current year.

SIMPLE IRA pros

• Easy for small employers to set up and administer
• Immediate vesting for employer contributions to an employee account
• Pre-tax dollars grow tax-deferred over time, making them more efficient
• Employers are required to make contributions to employee accounts

SIMPLE IRA cons

• RMDs start at age 72
• Lower contribution limits than 401(k) accounts
• Higher early withdrawal penalty if money is taken within two years of beginning contributions
• No Roth option

401(k): the basics

With a traditional 401(k), employees make contributions to the account with pre-tax dollars, and contributions are generally tax-deductible in the year they're made. Plan participants choose investment options, which have the potential to grow tax-deferred over time. Once you begin taking withdrawals in retirement, that money is taxed at your marginal tax rate.

A 401(k) is one of the basic accounts offered by many employers. There are a number of choices you might have access to as an employee. Your employer can offer profit-sharing contributions or matching contributions, which could provide you with free money for your future. Realize, though, that there might be vesting requirements, such as working at the company for a set period of time, before employer contributions are considered yours.

It’s also possible that your employer offers the ability for you to borrow from your 401(k) balance, which makes it possible to find a source of emergency funding if needed. Finally, your employer might offer a Roth 401(k) option, which allows you to contribute after-tax dollars that could potentially grow tax-free so you don’t have to pay taxes when you withdraw the money.

However, it’s important to note that a 401(k) also comes with various restrictions. If you withdraw money before you reach age 59 1/2, you might be subject to a 10% penalty on top of any tax you owe. Additionally, you must start taking RMDs at age 72. This applies whether you have a traditional 401(k) or a Roth 401(k).

For employers, a 401(k) can be harder and more expensive to administer. There are a number of requirements that employers must meet in order to offer a 401(k). Smaller employers might be more comfortable offering a SIMPLE IRA or another plan in order to avoid the administrative hassles.

In 2023, 401(k) contribution limits are $22,500 for those under age 50 and $30,000 for those age 50 and over. In 2024, these limits increase to $23,000 and $30,500.

401(k) pros

• Contributions to a traditional 401(k) are pre-tax and tax-deductible in the year they’re made
• Potential employer match can boost a 401(k) account balance
• Higher contribution limit than a SIMPLE IRA
• Ability to take a loan from the 401(k) if the employer plan allows it

401(k) cons

• Employer contributions might not be immediately vested
• Can be harder and more expensive for employers to administer
• RMDs — even for the Roth 401(k) — starting at age 72
• Early withdrawal penalty

How to pick between a SIMPLE IRA vs. 401(k)

For the most part, deciding between a SIMPLE IRA vs 401(k) is an issue for an employer. As an employee, you’ll have one choice: the plan offered by your employer. You must be a business owner in order to start one of these two plans.

In general, as a business owner, the biggest factor is the size of your company and your interest in scaling. If you have 100 or fewer employees, and you’re not planning on growing beyond that, a SIMPLE IRA can make more sense. It’s easy to set up and usually less expensive to administer than offering a 401(k).

On the other hand, if you have a larger business, or if you’re planning to scale up, a 401(k) can make sense if you want to offer employee benefits. It can take more time to set up, and you might have to jump through compliance hoops on a regular basis, but it might be worth it. There are plan administrators that can help you manage the regulatory requirements that come with a 401(k).

Employers are not allowed to offer both a 401(k) and a SIMPLE IRA account to employees. As a result, as an employee, the only reason you’d have access to both is if you were working two jobs, or if you changed jobs during the year and your new employer has a different plan. If you do end up with two different plans, remember that the combined contributions to your 401(k) and SIMPLE IRA can’t exceed the annual contribution limit for a 401(k).

If you want more retirement savings options than what your employer offers, you can consider opening an IRA on your own. You have the choice between a traditional or Roth IRA, and you can decide based on your income and tax strategy. Additionally, if you’re a business owner without employees (other than your spouse), you can consider a solo 401(k). This can be a way to contribute more each year, as you can make contributions as an employee and then match your contributions as the employer. Finally, business owners also have the ability to use a SEP IRA to make contributions to their own retirement plans.

Carefully consider your options before you move forward, as each account comes with its own requirements and regulations, as well as rules for RMDs, contribution limits, and other criteria.

FAQs

Bottom line

Saving for retirement is an important part of securing your financial future, whether you’re an employee or a business owner. As an employee, you probably won’t get a choice between contributing to a SIMPLE IRA vs. 401(k). Instead, you’re more likely to get whatever your employer offers, with the choice to contribute to a Roth or traditional IRA in addition to (or instead of) your employer’s plan.

Business owners who want to offer retirement benefits to attract more quality employees, though, need to decide what type of plan they’ll offer. When deciding, consider the size of your business and how much you want to deal with administrative paperwork. Consider speaking with an accountant or other business financial advisor to help you figure out what’s likely to work best for you.