SIMPLE IRA vs. 401(k): The Pros and Cons of Each Plan
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
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.
Earn up to $125 in cash rewards for finding and rolling over your 401(k)*
Get guided support locating your old account and making sure your rollover is done right.
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 |
|
|
Contribution limits |
|
|
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 |
|
|
Cons |
|
|
More details | ||
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. 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.
On a similar note...
