The 2021 SIMPLE IRA contribution limit is $13,500 and $16,500 if age 50 or older. Self employed individuals who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits.
The SIMPLE IRA is an employer sponsored retirement plan available to small businesses with less than 100 employees including sole proprietorships, partnerships, S corporations and C corporations.
Are you self employed and have no W-2 employees?
If you are then you should consider an Individual 401k as an alternative to a SIMPLE IRA. Self employed individuals who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits.
SIMPLE IRA
Features:
- A SIMPLE IRA is easy to set up and has low administrative responsibilities.
- 2021 SIMPLE IRA contribution limit is $13,500 or $16,500 if age 50 or older. In addition there is a maximum 3% employer contribution.
Disadvantages:
- Relatively low maximum annual contribution limits.
- Loans are not permitted.
What are the advantages of a SIMPLE IRA?
Self employed business owners that have a SIMPLE IRA are able to contribute up to 100% of their income up to the 2021 contribution limit of $13,500 or $16,500 if age 50 or older. As a result, significant contributions can be made into a SIMPLE IRA even at lower income levels. A good candidate for this plan doesn't mind the relatively low maximum contribution limits. Self employed individuals who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits.
Individual 401k
Features:
- 2021 Individual 401k contribution limit is $58,000 and $64,500 if age 50 or older due to a "catch-up" provision.
- Tax free loans are permitted with an Individual 401k plan. Loans are permitted up to 50% of the total value of the Individual 401k up to a maximum of $50,000.
- Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into a Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.
Disadvantages:
- Potentially greater administrative responsibilities and administrative fees compared to a SIMPLE IRA.
SIMPLE IRA Calculator
Compare how much could be contributed to a SIMPLE IRA versus an Individual 401k based on your income. Use the SIMPLE IRA Calculator.
