Employee Advantages of the Simple 401k

Many employers are turning to the simple 401k because of the convenience that it provides compared to the traditional 401k. However, many employees do not realize what types of advantages they can expect with the simple 401k. Here are a few employee advantages to consider about the simple 401k.

Employee Contributions

With this type of retirement account, you can choose to contribute a certain percentage of your income to the account. These contributions will be made on a tax-deductible basis. This will allow you to put more money into your retirement and start investing immediately. Instead of having to pay taxes and then invest the money, you will have more money to work with. You can contribute as much as $11,500 per year to your account. This allows you to contribute more money than if you were to simply invest in an IRA. By comparison, an IRA allows you to invest only $5000 per year to your retirement. Other types of retirement plans do not allow employees to contribute. They rely solely on employer contributions to be funded. By allowing you to contribute, you can take much of the guesswork out of planning for your retirement.

Loans Are Allowed

One of the major benefits of this type of plan is that you can borrow money against your retirement funds. Many retirement plans do not allow you to borrow against the funds. When you can borrow money against the funds in your simple 401k, this will allow you to avoid any early distribution penalties when you access the money. Typically, in order to get your hands on the money from your 401k, you have to pay a 10 percent early distribution penalty. In addition to that, you would have to pay income taxes on the money that you receive. With a simple 401k loan, you can get the money and not worry about income taxes. The process to borrow the money is very simple and typically does not require a credit check or income verification. You will then have a specific amount of time to repay the loan at a fair interest rate. For example, you might have to pay interest at the prime rate plus 1 percent.

Employer Contributions

In addition to your being able to contribute money to the account, your employer will be able to contribute to your account. When an employer contributes to your account, they are going to get a tax deduction at the end of the year. Therefore, they have a good incentive to help fund your retirement.

Employers have two different options when it comes to contributing to a simple 401k. They can choose to do an contribution of up to 3 percent of your income. This is a dollar-for-dollar match. They can also choose to do a non-elective contribution of 2 percent of each employee's income. With the non-elective contribution, the money goes to every employee that is eligible for the plan, regardless of whether the employee contributed to his or her own account. 

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