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401(k) Advantages Over SEP and SIMPLE IRAs

It may seem confusing trying to figure out what sort of retirement plan is the best fit for your business. Yet when you compare a 401(k) to SEP and SIMPLE IRA options, the main plan options for businesses with less than 25 employees, it becomes a much easier decision.

401(k)s not only offer higher contribution limits, but also offer more flexibility in design to manage business costs, taxes, and enable penalty-free access to funds via a loan if an emergency arises before reaching retirement age (59½). A summary of important differences include:

  401(k) SIMPLE IRA SEP IRA
Who can contribute Employee; Employer optional Employee & Employer Employer only; must contribute for all eligible employees
Max employee contribution $18,000 w/$6,000 catch-up if over 50 years old $13,000 w/$3,000 catch-up if over 50 years old Not applicable
Employer contributions Optional, up to 25% of W-2 payroll with a $54K cap ($60,000 if over 50 years old) plus profit sharing options Required match of 100% first 3% of participating employee contributions or 2% of all eligible employee salaries Optional, but only way to fund; up to 25% of W-2 payroll with a $54K cap
Vesting timing for employer contributions Multi-year options or immediate Immediate Immediate
Access to funds before age 59½ Penalty-free loans or 10% penalty for early withdrawal 25% penalty for withdrawing within first 2 years of participating; 10% thereafter 10% penalty for withdrawal before age 59½

 

Also the Roth option available with a 401(k), which has no income limitation, is another advantage not available in the IRA options. As the costs for small business 401(k)s have dropped substantially, there aren't many reasons to consider anything else.

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