Ask a Fool: What's the difference between a 401(k) and a SIMPLE IRA?
If you have a SIMPLE IRA at work, here's what you need to know about it.
Q: I've participated in a 401(k) for years, but my new employer offers a SIMPLE IRA. What's the difference?
A SIMPLE IRA is a type of retirement plan designed for smaller businesses and self-employed individuals, so if your new employer is significantly smaller in size than your previous one, that could certainly explain the difference in plans offered.
SIMPLE stands for "savings incentive match plan for employees," and as the acronym implies, these plans are indeed simple to start and manage, which is why they can be so appealing to employers. Aside from coordinating employee deposits, there are few reporting or administrative duties to worry about. 401(k) plans, on the other hand, can be more complex and costly.
Like a 401(k), you can choose to participate by having a portion of your compensation deferred into the account. All of your contributions, up to the IRS's annual limit ($12,500 in 2017), are tax-deductible.
However, there are a few major differences. For one thing, your employer is required to contribute. Your employer can either match employee contributions up to a maximum of 3% of compensation, or can contribute a fixed rate of 2% of every employee's compensation, regardless of whether they participate or not. SIMPLE IRA funds are immediately fully vested, including your employer's contributions.
On the downside, there is no such thing as a SIMPLE IRA loan, unlike with a 401(k). However, you are allowed to take a penalty-free early distribution from a SIMPLE IRA to pay for qualified college expenses, or withdraw up to $10,000 for a first-time home purchase. Both of these exceptions are not allowed in a 401(k).
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