Author Topic: Simple IRA vs 401K  (Read 573 times)

joenorm

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Simple IRA vs 401K
« on: May 13, 2020, 07:50:07 AM »
Hello,

My employers recently set up a Simple IRA for all their employees. I think they contribute 2% of our yearly earnings into the account.

We also have the ability to contribute percentages of our income into this account if we choose. Before checking I thought this would be tax deductible, turns out it is not(Someone here can confirm?)

Does that mean I get taxed twice on this money? Is it no different from me just investing myself? Trying to figure out what the point of this plan is besides being able to thoughtlessly invest out of my paycheck and the added 2% from the employer.

Would they be better off setting up a 401K? Its a small business, around 10 employees.

thanks for the insight


terran

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Re: Simple IRA vs 401K
« Reply #1 on: May 13, 2020, 07:56:29 AM »
A simple IRA is (not) tax deductible in the same way that a 401(k) contribution is (not) tax deductible. Which is to say, you don't deduct the contribution on your taxes like you do with a regular IRA, but instead your employer excludes the contribution from box 1 of your W2, so it's deducted straight from your income before you file taxes. It still reduces the amount of tax you pay now though.

You would be better off if they set up a 401(k) (higher limits), but your employer is probably better off with the Simple IRA (lower fees).

Keep in mind that your IRA deduction income limits will be lower now that you're covered by a retirement plan at work.

joenorm

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Re: Simple IRA vs 401K
« Reply #2 on: May 13, 2020, 10:31:01 AM »
So are they the same thing besides the contribution limits? How do I calculate my AGI?

MDM

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Re: Simple IRA vs 401K
« Reply #3 on: May 13, 2020, 11:11:46 AM »
So are they the same thing besides the contribution limits? How do I calculate my AGI?
Gross pay minus pre-tax deductions = W-2 pay.

Your W-2 pay goes into W-2 box 1, and from there to line 1 of https://www.irs.gov/pub/irs-pdf/f1040.pdf (2019 version).

After that, follow Instructions for form 1040 (2019) | Internal Revenue Service.

terran

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Re: Simple IRA vs 401K
« Reply #4 on: May 13, 2020, 11:44:11 AM »
They're not the same thing, but they do have the same effect on AGI and taxable income. In addition to contribution limits another difference is that a Simple IRA causes problems with making backdoor Roth contributions (only needed if your income is too high to make direct Roth contributions)