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SIMPLE IRA vs. 401(k): Which Plan is Right for You?

By    |   Tuesday, 26 May 2015 12:35 PM

SIMPLE IRA and 401(k) plans are retirement saving accounts set up by employers in small businesses. Though similar in nature, the eligibility requirements of each plan can make one better suited than the other for a person’s employment and financial situation.

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Savings Incentive Match PLan for Employees (SIMPLE IRA)

A SIMPLE IRA plan allows employers and employees to make contributions to an employee’s retirement savings account. The account is set up by the employer but is predominantly maintained and contributed to by the employee. The employer must make a tax-deductible contribution equal to 1 percent of an employee’s compensation but cannot contribute more than 3 percent. Contributions are made on a pre-tax basis for employees and accumulated earnings are tax-deferred. Contribution restrictions for employees vary year to year.

Withdrawals from a SIMPLE IRA account prior to the age of 59 and a half are subject to a 25 percent penalty tax (in addition to normal income taxes) within the first two years of filing the SIMPLE IRA. After the first two years, there is only a 10 percent penalty tax for early withdrawals.

To qualify for a SIMPLE IRA, an employee must earn no less than $5,000 the preceding two years and must be planning on making another $5,000 from their employer in the following year. An employer can only set up a SIMPLE IRA plan if they do not offer other retirement plans.

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401(k)

401(k) plans enable employers to make contributions to an employee’s retirement savings account that are taken from an employee’s salary. These elective contributions are free from federal income tax but are subject to some taxes under Social Security and Medicare.

Employees can make hardship withdrawals in times of great financial need under most 401(k) plans but the amounts in which an employee can withdraw are limited. Early withdrawals before the age of 59 and a half carry a 10 percent penalty tax.

Eligibility requirements for 401(k) plans are largely under the employer’s discretion. However, the employer must offer the 401(k) retirement plan and there is usually a set amount of time in which an employee must work for the employer before becoming eligible.

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SIMPLE IRA and 401(k) plans are retirement saving accounts set up by employers in small businesses. Though similar in nature, the eligibility requirements of each plan can make one better suited than the other for a person's employment and financial situation.
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Tuesday, 26 May 2015 12:35 PM
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