When deciding to implement a retirement plan for your business, you will be presented with two options: a 401(k) or a SIMPLE IRA. While a 401(k) is more recognizable, both options offer retirement savings for eligible employees, and can include contributions from both employees and employers. We will explore the advantages of both plans and highlight why a 401(k) may be the better choice for retirement savings.
How 401(k)s and SIMPLE IRAs Function
It’s important to recognize the similarities between these two retirement plans.
Both plans enable employees to automatically contribute a portion of each paycheck into a retirement investment account. These employee contributions (Pre-Tax and/or Roth), referred to as an “elective deferral,” can grow tax-free until the employee withdraws them.
Additionally, both plans allow (and in the case of a SIMPLE IRA, require) employers to make contributions to their employees’ accounts.
SIMPLE IRA Annual Contributions
The 2025 employee contribution limit is $16,500. If permitted by the plan, participants aged 50 or older can make catch-up contributions of $3,500. Contributions can be made via Pre-Tax and/or Roth. Roth contributions are new and still somewhat rare to see. Employers have two options for contributions. One is a matching contribution of up to 3% of an employee’s pay. Instead of matching contributions, an employer can choose to make nonelective contributions of 2% of each eligible employee’s compensation. If the employer makes this choice, it must make nonelective contributions whether or not the employee chooses to make contributions. Each employee is always 100 percent vested.
401(k) Annual Contributions
For 2025, the employee contribution limit is $23,500. Those 50 and older can contribute up to $31,000, while individuals 60 to 63 have a higher limit of $34,750. Contributions from the employee can be made via Pre-Tax and/or Roth. Employer contributions are not mandatory but are recommended due to annual testing which can limit key participant contributions. The total combined limit for employee and employer contributions is $70,000. V schedules are permitted.
Why 401(k)s may be a better choice than SIMPLE IRAs
Building Wealth
With 401(k) plans, the total annual contribution limit (including both employee and employer contributions) is $70,000, providing an opportunity for wealth accumulation. By adding a Cash Balance plan, you can potentially save an additional $200,000. This combination of tax-advantaged retirement plans is a powerful way to grow wealth through the benefits of compound interest.
Customizable Plan Design
401(k) plans offer flexibility in their design, allowing employers to customize contribution structures. Employer contributions can be adjusted to suit the company and participant loans are allowed. Vesting schedules can help retain employees and eligibility criteria can be implemented.
Investment Costs
SIMPLE IRAs often come with upfront costs, where a portion of your contribution is charged a fee at the time of purchase. This is usually to cover a commission for advisors managing the account. In contrast, 401(k) plans offer mutual funds that do not require an upfront fee.
Benefits Package
A 401(k) is generally viewed as a better benefit than a SIMPLE IRA because of its higher contribution limits, customizable plan features, potential employer matching and loan options, making it a strong tool for attracting and retaining employees.
Have a SIMPLE IRA? Convert today!
You can transfer a SIMPLE IRA to a 401(k) mid-year. To make the switch, you’ll need to:
• Provide employees with a 60-day notice
• Manually roll over SIMPLE IRA assets
• Follow restricted 401(k) contribution limits during the first year
Reach out to American Trust Retirement to switch from a SIMPLE IRA or start a 401k!