401k Contributions Key BenefitsWhether you are a small business owner or you are an employee that works for a small business, it is important that you know and understand the differences between Simple IRA and 401k contributions. There are different guidelines that apply to each retirement account, and they can affect the money the employer has to give and the employee can benefit from. As you are saving for retirement or if you are trying to choose a retirement plan for your small business, the differences between the contributions will become important to you. One of the first differences is the amount that you can contribute tax deferred each year. In 2006, Simple IRA's could only have $10,000 contributed to them with tax deferred, whereas a 401k contribution limit is a maximum of $15,000. Employees that are looking for the best way to save for retirement may prefer to have a 401k plan, since they can contribute more tax deferred income. But one must also realize that a 401k plan takes awhile to become fully vested, whereas a Simple IRA plan allows an employee to be immediately 100% vested. Another difference is the extra money that can be contributed in a catch-up plan for employees that are over the age of 50. A Simple IRA only allows those over 50 to contribute an extra $2500 each year to help them catch up. In contrast, the 401k plan allows these employees, who are over 50, to increase their 401k limit by an extra $5000 to their plan to help them save more towards their retirement. A Simple IRA requires that employers make a minimum contribution to the account. If the contributions are being made by both the employer and the employee, then they are required to match what the employee contributes, up to 3% of the employees total salary. If the employee is not contributing to this fund, then the employer is only required to contribute a flat 2% of the amount the employee makes each year to the account. This brings us to an important difference between the Simple IRA contributions and the 401k contributions. Employers are allowed to contribute up to 1% lower as long as it does not occur more than 2 out of 5 years with a Simple IRA. This is designed to make it easier for small businesses that may have tight finances. Before business owners make a choice of what retirement plan to use, they should carefully consider the differences between Simple IRA contributions and 401k contributions, so they can make the best choice for the company. Employees should also consider these differences so they can choose companies that have retirement plans that will best benefit them as well. Being aware of these differences can help you become more knowledgeable about how these retirement plans work so you can better plan for your retirement. Simple Ira >> Privacy Policy >> Terms Of Use >> Disclaimer >> About Us >> Contact Us |