SIMPLE IRA vs. 401(k): The Pros and Cons of Each Plan

The SIMPLE IRA vs. 401(k) decision is, at its core, a choice between simplicity and flexibility for employers.

The aptly named SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is the more straightforward of the two options. It’s quick to set up, and ongoing maintenance is easy and inexpensive. But if you have employees, you are required to contribute to their accounts.

Although a 401(k) plan can be more complex to establish and maintain, it provides higher contribution limits and gives you more flexibility to decide if and how you want to contribute to employee accounts.

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SIMPLE IRA vs. 401(k)

Here are the need-to-know differences between SIMPLE IRAs and 401(k)s:

	SIMPLE IRA	401(k)
Employer eligibility	Employers with 100 or fewer employees.	Any employer with one or more employees.
Employee eligibility	All employees who have compensation of at least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5,000 in the current year. In 2025, this threshold rises to $5,100.	All employees at least 21 years old who worked at least 1,000 hours in a previous year, or 500 hours over the past three years. Beginning with 2025 plans, employees will need to have worked 500 or more hours over the past two years.
Employer contribution rules	Mandatory employer contribution: Either matching contribution of up to 3% of employee's pay or contribution equal to 2% of employee’s compensation, even if employee does not contribute. All contributions vest immediately. Employer contributions deductible on business tax return	Employer contributions are optional. Employee contributions vest immediately. Employer sets vesting schedule for employer contributions. Required proportional contributions for each eligible employee if you contribute for yourself. Employer contributions deductible up to IRS limits.
Contribution limits	Employee contribution limit: $16,000 in 2024 and $16,500 in 2025. Catch-up contributions in 2024 and 2025 for those 50 and older are $3,500, though in 2025, those ages 60 to 63 can contribute $5,250. Some participants in applicable plans may be able to contribute more. No limit on employer matching contribution; if using the 2% contribution based on compensation, employer match allowed on up to $345,000 of salary in 2024 ($350,000 in 2025).	Employee contribution limit: $23,000 ($30,500 for those age 50 and older) in 2024. In 2025, limits rise to $23,500 ($31,000 for those 50 and older). In 2025, those ages 60 to 63 will be able to contribute up to $34,750. Combined contributions of employee and employer are limited to the lesser of 100% of compensation or $69,000 ($76,500 if age 50 and older) in 2024. In 2025, those limits are $70,000 and $77,500, respectively.
Administrative responsibilities	No annual tax filing requirements; annual plan details must be sent to employees.	Subject to annual compliance testing to ensure plan does not favor highly compensated employees.
Fees	Minimal account fees.	Varies by plan.
Investment options	Any investments available through the financial institution that holds accounts.	Investment selection curated by employer and plan administrator.
Pros	Requires minimal administrative management. Roth SIMPLE IRA option available. Lower setup and maintenance costs. Participants may be allowed to choose account provider.	Higher contribution limits. Roth 401(k) option available. Employer contribution is optional. Vesting schedule set by employer. Plan may permit loans.
Cons	Mandatory employer contribution. Lower contribution limits. Additional 10% tax on distributions made before age 59 ½. That tax rises to 25% if the withdrawal is within the first two years of participation in the plan. No loans allowed. Employer cannot maintain any other type of retirement plan.	Higher setup costs and administrative requirements. Plan fees can be high, especially for small businesses.
More details	What Is a SIMPLE IRA?	What Is a 401(k)?
Source: Internal Revenue Service.

SIMPLE IRA vs. 401(k): How to decide

Startup costs and ease of setup often dictate the choice between retirement savings plans. But there are other factors to consider as well. To help decide which plan is best, answer the following questions:

Why are you setting up a retirement plan?

For many small-business owners, the answer is that they’re trying to maximize their own retirement savings dollars. If that’s the case, contribution limits should weigh heavily in your decision. For high earners especially, the higher 401(k) contribution limit makes it a more attractive choice than a SIMPLE IRA.

» Thinking about the future? Learn about succession planning for your business.

Did you know the Roth options have changed?

As mentioned earlier, the IRS allows employers to offer a Roth 401(k). (Quick reminder: A Roth 401(k) is funded with after-tax contributions in exchange for tax-free distributions in retirement.) Previously, there was no Roth provision for SIMPLE IRAs, but a section of the Secure 2.0 Act allows SIMPLE IRAs to accept Roth contributions as of January 2023

Senate.gov. SECURE 2.0 Act of 2022. Accessed Nov 20, 2024.

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. And the IRS allows participants to save in both a SIMPLE IRA and a Roth IRA at the same time.

Will you need to adjust employer contributions?

Although a nice perk to attract potential employees, employer contributions are not required of companies that offer 401(k) plans. You also have the freedom to set vesting terms, which allows you to require employees to remain employed by you for a set time before taking ownership of your contributions to their accounts. Employer contributions to employee SIMPLE IRA accounts are mandatory, although you can choose between two matching arrangements dictated by the IRS. Contributions to a SIMPLE IRA are immediately 100% vested.

» Ready to open a SIMPLE, traditional or Roth IRA? Find the best IRA account for you.

Other alternatives

If you are self-employed or a small-business owner, your options may not be limited to a SIMPLE IRA vs. 401(k). There are a variety of retirement plans at your disposal.

For example, if you run a business with no employees, a solo 401(k) is worth considering. As the employer and (your own) employee, you’re allowed to contribute a total of up to $69,000 ($76,500 if age 50 or older) in 2024. In 2025, that increases to $70,000, or $77,500 for those 50 and above.

A SEP IRA also has a high contribution limit for business owners and self-employed people and allows Roth contributions. The drawbacks: Like the SIMPLE IRA, a SEP requires employers to contribute to eligible employee accounts.

» MORE: Pros and cons to the retirement options for self-employed people.