Getting the most out of your 401k plan

Hi! My name is Jay Hughes and I just got hired for my first job. I was looking forward to invest in 401(k) plans or SIMPLE IRA, but then I came across the SIMPLE 401(k) plans that my company is providing. I need to understand what exactly SIMPLE 401(k) plans are and whether I’m eligible for it or not. Do I have to take any tests? Also I need to know about its pros and cons. – Jay

Hello Jay. You’ve made a wise decision to think about the retirement plans very early on, and you’ve got some good questions. I’ll first start by answering your first question about SIMPLE 401(k) plans.

A SIMPLE 401(k) is one of the members of the 401(k) contribution plan. It is a cross between traditional 401(k) and SIMPLE IRA. Its key similarity with SIMPLE IRA is that it provides two-year grace period but only for the up-and-coming businesses.

It is only for the small business owners with a maximum of 100 employees. So, if your company is providing it then it must be qualified in that line. You will be eligible if you are over 21 years of age and have been in service for at least a year.

You also need to understand how much or what kind of contribution your employer can make. They can make a matching contribution, which is up to 3 percent of each employee’s pay. They can also make a non-elective contribution, which is about 2 percent of each employee’s pay.

The SIMPLE 401(k) plan does not require any tests. So they serve as a better alternative to traditional 401(k), where the function is pretty much the same but the cost is less.

Small business employers and their employees fancy the possibility of borrowing the loan and paying it back with interest to their own bank accounts. It bears very close resemblance to the idea of making money out of thin air. Anyways, loans are one good feature that comes with SIMPLE 401(k) plan.

The disadvantages are that unlike the traditional 401(k) plan, SIMPLE 401(k) has lower contribution limits. As of 2015, the limit is $18,000 for traditional 401(k) and is $12,500 for SIMPLE 401(k).

The SIMPLE 401(k) plan contributions can be immediately vested at 100 percent, so the employees will be able to withdraw their entire account balance whenever they want, given that they meet the requirements to receive distributions.