Retirement options compared

Q: How does a 401(k) differ from a SIMPLE IRA?

A: A SIMPLE IRA is a type of retirement plan designed for smaller businesses and self-employed individuals.

SIMPLE stands for “savings incentive match plan for employees,” and these plans are indeed simple to start and manage. Aside from coordinating employee deposits, there are few reporting or administrative duties. 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’ annual limit ($12,500 in 2017), are tax-deductible.

But 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. 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 penaltyfree early distribution 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).