| |
SIMPLE IRA |
401(k) |
Individual 401(k) |
| Eligible Employers |
Sole proprietorships, partnerships, limited liability companies, and corporations with fewer than 100 eligible employees. |
Corporations, partnerships, limited liability companies. |
Sole proprietorships, partnerships, limited liability companies, and corporations with no eligible employees. |
| Can employer sponsor other qualified retirement plans? |
No. |
Yes. |
Yes. |
| Eligible Employees |
Employees who meet all these criteria:
| • |
Received $5,000 or more in compensation in each of two prior years. |
| • |
Is expected to earn $5,000 in the current year. |
|
Employees who meet all these criteria:
| • |
At least 21 years of age. |
| • |
Worked at least 1,000 hours for the business in the prior year. |
|
Owner/employee and his/her spouse or direct descendants. |
| Funding Responsibility |
Employee contributions (salary reductions) and employer contributions. |
Employee contributions (salary reductions) and optional employer contributions. |
Employee contributions (salary reductions) and optional employer contributions. |
| Employer Annual Contributions |
3% matching contribution formula: Employer matches what each participant contributes to his/her own account – dollar for dollar – up to 3% of the employee's
compensation. (Can be reduced to 1% in any two years out of a 5-year period.)
- OR -
2% non-elective contribution formula:Employer contributes amount equal to 2% of compensation to each eligible employee's account, whether or not employee makes any contribution to his/her own account. |
Optional employer contribution according to plan terms.
Employee's combined with employer's optional contribution: Up to a maximum of 25% of compensation paid to all eligible employees or $41,000 per participant in plan year 2004. |
Owner/employee: $13,000 deferred-income contribution plus a 25% profit sharing contribution for combined maximum of $41,000 in 2004. |
| Employee Annual Contributions |
Up to 100% of compensation, for a maximum of $9,000 in 2004.
Age 50 and up: May make "catch-up" contribution of additional $1,500 in 2004. |
Up to a maximum of $13,000 in 2004.
Age 50 and up: May make "catch-up" contribution of additional $3,000 in 2004. |
Age 50 and up: May make "catch-up" contribution of additional $3,000 in 2004. |
| When Withdrawals Can Be Taken |
Withdrawals taken at any time. If the employee is under age 59½, may be subject to a 25% penalty tax if taken within the first two years of participation, or a 10% penalty if taken after two years. |
Withdrawals may be taken whenever a "triggering event" occurs. The plan may permit loans and hardship withdrawals. (Hardship withdrawals may be subject to a 10% penalty if the participant is under age 59½.) |
Withdrawals may be taken whenever a "triggering event" occurs. The plan may permit loans and hardship withdrawals. (Hardship withdrawals may be subject to a 10% penalty if the participant is under age 59½.) |
| Can Rollover To: |
|
|
|
| Traditional IRA |
Yes. |
Yes. |
Yes. |
| SIMPLE IRA |
Yes. |
Yes.2 |
Yes.2 |
| Roth IRA |
Yes. |
No. |
No. |
| SEP IRA |
Yes. |
Yes. |
Yes. |
| SIMPLE 401(k) |
No. |
Yes.1 |
Yes.3 |
| Safe Harbor 401(k) |
Yes. |
Yes. |
Yes. |
| 403(b)1 |
Yes. |
Yes. |
Yes. |
| 457 Governmental |
Yes. |
Yes. |
Yes. |
| 401(k)1 |
Yes. |
Yes. |
Yes. |
| Vesting of Contributions |
Immediate – for employee and employer contributions. |
Employee contributions vested immediately. Employer contributions vest according to plan terms. |
Immediate. |
| Administration |
Discrimination testing required.
No employer tax filings. |
Discrimination testing required.
Form 5500 and special IRS testing required to ensure plan does not discriminate in favor of highly compensated employees. |
No discrimination testing required.
Form 5500 not required until the plan’s assets exceed $100,000 or a non-owner employee qualifies to participate in the plan. |
| Pros |
Employer contributions are deductible from taxable business profits.
Employees' salary-deferral contributions can reduce their income taxes for that year.
All growth of IRAs is tax deferred.
Employees may be excluded if they are non-resident aliens or covered by collective bargaining agreement.
No annual Form 5500 to file with IRS.
Reduced administrative requirements, limited regulatory reporting. |
Employer contributions are deductible from taxable business profits.
Higher deferral limits than SIMPLE IRAs.
Employees' salary-deferral contributions can reduce their income taxes for that year.
Certain employees may be excluded. Example: Those who work less than 1,000 hours in a year.
Employer contributions are discretionary.
Vesting schedule may be used on employer matching or discretionary contributions.
Assets are protected from creditors and/or lawsuits. |
Higher deferral limits than SIMPLE IRAs. Owner/employee may defer up to $13,000 in 2004.
Profit sharing contribution also allowed, up to 25% of income, for combined deferral/profit sharing maximum of $41,000 in 2004.
Salary deferral contributions can reduce participant’s income taxes for that year.
Assets are protected from creditors and/or lawsuits.
Contributions are tax deductible and any growth of account is tax deferred. |
| Cons |
Less plan design flexibility than a profit sharing plan.
Employer contributions are mandatory and 100% vested.
Company may maintain no other plan.
IRA plans not protected from personal creditors and/or lawsuits. |
Administratively more difficult than SEP or SIMPLE. |
Plan design may have to be revisited if employees are added. |
