Advantages of a SIMPLE IRA
With many types of IRAs available, it makes sense to ask about the specific advantages of a SIMPLE IRA versus a Roth or traditional IRA.
Here are some benefits of the SIMPLE IRA that may help with your decision:
- Higher contribution limits than traditional IRAs: If you’re under age 50, the 2023 contribution limit for a SIMPLE IRA is $15,500, whereas, for a traditional IRA, the contribution limit is $6,500 (an additional $1,000 in catch-up contributions is available to those over 50).
- It’s important to note, however, that your SIMPLE IRA contributions do not count against the $6,500 limit, and you’re eligible to max out both a SIMPLE IRA and a traditional IRA in the same tax year.
- Employer contribution differences: With a traditional IRA, only you, the account holder, are eligible to make contributions. With a SIMPLE IRA, your employer can either match contributions of up to 3% of your compensation or fixed contributions of 2%. Recall that a SIMPLE IRA is an employer-sponsored retirement plan, while a traditional IRA is not.
- Flexible withdrawal options: Like any other tax-deferred retirement plan, you’re subject to taxes when you withdraw money from your SIMPLE IRA in retirement. If you’re over 59 1/2, you won’t owe any penalties upon withdrawal. If you’re under 59 1/2, you’ll also owe a 10% additional tax on any amounts withdrawn; this additional tax increases to 25% if you’ve had your SIMPLE IRA for less than two years.
- There are a variety of situations outlined by the IRS that can help you avoid the additional tax rules, but these should be considered one-off exceptions.
- All tax-deferred retirement plans, like SIMPLE IRAs, pre-tax 401(k)s, and pre-tax traditional IRAs will all come with Required Minimum Distributions (RMDs) in retirement.
- Easy to set up and manage: As an employee, setting up a SIMPLE IRA is easy. Your employer sets up the account for you and provides you with details about the plan. All you have to do is sign an agreement to get started, and your SIMPLE IRA assets will grow tax-advantaged once you invest them.
Factors to Consider Before Rolling Over a 401(k) to a SIMPLE IRA
As we’ve emphasized, it’s crucial to consider all key factors before deciding to roll your 401(k) into your SIMPLE IRA. The differences between the two account types are important, so make sure you understand them before making a call.
Below, we’ll explore a few considerations that may help you make your decision.
Compare Fees and Expenses
Fees can significantly impact your accumulated retirement savings. Typically, 401(k)s are associated with higher fees given the plan administrator’s expenses.
Often, SIMPLE IRAs have lower fees, but they also come with lower contribution limits. Be sure to compare the fees of your 401(k) plan with your SIMPLE IRA before you make your decision.
Understand Your Investment Options
Although your employer may contribute to a 401(k) as they do with your SIMPLE IRA, with a 401(k), your employer may require you to work at the company for a period of time before the employer’s contributions are actually yours. This is known as vesting.
With a SIMPLE IRA, all contributions are immediately vested; even when you leave the job, existing contributions are yours with no vesting requirements.
You also may have more investment options with a SIMPLE IRA, as you might have access to a wider investment menu (think ETFs, stocks, bonds, and more) than you do with your 401(k) plan. With a 401(k), the plan administrator may only offer a limited set of mutual fund options from which you must choose.
Consider Your Retirement Goals
When you choose to roll over your 401(k), it’s a good idea to begin with the end in mind. What are your retirement goals? How does your retirement savings plan prepare you for those goals?
Weigh the benefits of a SIMPLE IRA given its early withdrawal penalties, two-year period rule, and other regulations that might create issues for you down the line. At the end of the day, both a SIMPLE IRA and 401(k) are employer-sponsored plans with tax advantages, so contributing to either is likely to be a smart financial move.
Need Help Managing a 401(k) to a Simple IRA Rollover?
Rolling over your 401(k) into a SIMPLE IRA (a “Savings Incentive Match Plan for Employees”) can help you organize your finances, potentially reduce your fees, and assist in gaining access to a broader range of investments. But this choice is one you should make carefully and with advance planning.
Managing a rollover when you change jobs or prepare to retire can be challenging, and working with a trusted partner like Capitalize can help make the process go smoothly. We help you track down your previous 401(k) or other qualified plan accounts, communicate with your plan administrator, and help you effect a tax and penalty-free rollover.
Learn how we can help with a stress-free rollover today.