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compare simple ira and 401k

There are a lot of options available to small companies when establishing an employer sponsored retirement plan.  For companies that have employees in addition to the owners of the company, the two most common plans are Simple IRA Plans and 401(k) Plans.

The right fit for your company depends on:

  • What are the company’s primary goals for establishing the plan?
  • How much the owner(s) plan to contribute to the plan?
  • How many employees does the company have?
  • Do you want to restrict the plan to only full time employees?
  • The cost of maintaining each plan?
  • Does the company intend to make an employer contribution to the plan?
  • Diversity of the investment menu

Below is a chart that contains a quick comparison of some of the main features of each type of plan:

simple ira vs 401K comparison chart

For many small companies it often makes sense to start with a Simple IRA plan and then transition to a 401K plan as the company grows or when the owner intends to start accessing the upper deferral limits offered by the 401(k) plan.

Simple IRA’s are relatively easy to setup and the administrative fees to maintain these plans are typically lower in comparison to 401(k) plans.   Most Simple IRA providers will only charge $10 – $30 to custody the accounts.

By comparison, 401(k) plans are ERISA covered plans which require a TPA Firm (third party administrator) to maintain the plan documents, conduct year end plan testing, and file the 5500 each year.  The TPA fees vary based on the provider and the number of employees eligible to participate in the plan. A ballpark range is $1,500 – $2,500 for companies with under 50 employees.

However, the additional TPA fees associated with establishing a 401(k) plan may be justified if:

  • The owners intend to max out their employee deferrals
  • The owners are approaching retirement and need to make big contributions
  • The company wants to maintain flexibility with the employer contribution
  • The company would like to make Roth contributions, loans, or rollovers available

WARNING:  Most investment providers are “one trick ponies”.    They will talk about 401(k) plans and not present other options because they either do not have a thorough understand of how Simple IRA plans work or they are only able to offer 401(k) plans.  Before establishing a retirement plan it is important to work with a firm that presents both options, helps you to understand the difference between the two types of plans, and assist you in evaluating which plan would best meet your company’s goals and objectives.


Michael Ruger

About Michael………

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

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Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.