SIMPLE IRA vs. 401(k): retirement plans that help you hire

The moment your business grows past you, retirement plans change character. A Solo 401(k) was a tax shelter for one; now a plan is a recruiting and retention tool — one of the first benefits good candidates ask about after health insurance. For a small team, the realistic menu is two options: the SIMPLE IRA and the small-business 401(k). They differ in cost, contribution room, flexibility, and how impressive they look in a job offer.

The SIMPLE IRA: cheap, rigid, genuinely simple

• Employee contribution limit: $16,500 (2026), plus catch-up after 50 — meaningfully lower than a 401(k).
• Mandatory employer money, pick one: match dollar-for-dollar up to 3% of pay for contributors, or give 2% of pay to every eligible employee regardless of participation. This is not optional — it's the price of the plan's simplicity.
• Cost to run: often $0–500/year. No annual government filing (no Form 5500), no discrimination testing, minimal administration. Most brokerages set one up in a week.
• The catches: available only to employers with 100 or fewer employees; you generally can't run any other plan alongside it; a brutal 25% early-withdrawal penalty applies in an employee's first two years; and no Roth option at many providers (Roth SIMPLE contributions are newly permitted but rollout is spotty).
• Immediate vesting: every employer dollar belongs to the employee instantly — good for trust, no retention hook.

The small 401(k): more room, more rules, more signal

• Employee contribution limit: $23,500 (2026) plus catch-ups — and total contributions (employee + employer) can reach $70,000 for high earners like, notably, you.
• Employer contributions are flexible: none, matching, or profit-sharing, changeable year to year. The popular 'safe harbor' design (e.g., 4% match) skips the annual discrimination testing in exchange for a committed match.
• Cost to run: modern small-business providers (Guideline, Human Interest, Employee Fiduciary and similar) charge roughly $100–200/month base plus a few dollars per employee — call it $1,500–3,000/year — and handle the Form 5500 filing and testing.
• Extras a SIMPLE can't match: Roth contributions, participant loans, vesting schedules on employer money (a real retention tool), and higher perceived prestige — '401(k) with match' reads as a real employer in a job posting.

How to actually decide

1. If you want maximum simplicity and modest cost, and your team is small and stable: SIMPLE IRA. It's a real, respectable benefit for $0 admin.
2. If you (or a partner) want to shelter serious personal income: 401(k) — the SIMPLE's lower cap costs a high-earning owner thousands in lost tax deferral every year.
3. If you're competing for talent against employers with real benefits: 401(k) with a match is table stakes in many industries; a SIMPLE reads as a smaller commitment.
4. If you're cost-sensitive right now: price the 401(k) AFTER the startup tax credits — for teams under ~50 employees the credits frequently cover the entire admin bill for three years.
5. Check your state: many states now mandate that employers without a plan enroll workers in a state-run auto-IRA. If you're going to be required to offer something anyway, choosing your own plan usually beats the default.
6. Timing note: SIMPLE IRAs generally must be set up by October 1 to run for that calendar year, and switching from a SIMPLE to a 401(k) has its own transition rules — plan the change for a year boundary.

The bottom line

SIMPLE IRA: near-zero cost, mandatory small match, $16,500 ceilings — the right floor for a small stable team and a cost-conscious owner. 401(k): $1,500–3,000/year (often erased for three years by startup credits), flexible design, and $23,500–70,000 of room — the right answer once the owner earns real money or the hiring market demands it. Either one beats the actual most common small-business retirement plan, which is nothing.

The decision at a glance

A useful tiebreaker most owners miss: what do you, the owner, want to save personally? If you want to shelter more than $16,500 of your own money, the 401(k)'s higher limit often pays for its own admin costs purely in your own tax savings — before counting any recruiting or retention benefit for the team.