What is a simple IRA?

A SIMPLE IRA, Savings Incentive Match Plan for Employees, is a version of a traditional IRA for small businesses and self-employed individuals. Similar to other traditional IRAs, contributions are tax deductible and investments grow tax deferred until the account holder withdraws money in retirement.

What is the difference between a SIMPLE IRA and a SEP IRA?

SIMPLE IRAs allow employees to make contributions, unlike SEP IRAs. With a SIMPLE IRA, employers are required to make a fixed contribution or elect to match a higher percentage of an employee’s contributions. If the employer elects to make matching contributions, they are not required to contribute to the IRA unless the employee contributes.

What are the benefits of a SIMPLE IRA?

SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs. They are cheaper less cumbersome to set up and maintain than most other workplace retirement plans, such as a 401(k) plan.

From the Employer Perspective

To set up a SIMPLE IRA plan, an employer must have 100 or fewer employees who are each earning more than $5,000 per year. This includes any employee who worked at any point in the calendar year. The employer can not have any other retirement plans in place besides the SIMPLE IRA. The company must use the same contribution plan for each employee.

How much can be contributed to a SIMPLE IRA?

An employee can contribute a percentage of compensation up to a limit of $12,500 for 2016. If the employee is older than 50, they can make an additional $3,000 “catch up” contribution. As long as the employer maintains the plan they must elect to contribute a fixed percentage of compensation, or to match the employee’s contribution up to 3% of compensation. If the employee does not contribute to their IRA and the employer elects to follow the matching contribution plan, then they are not required to contribute any amount to the employee’s account.

Is a SIMPLE IRA right for you?

SIMPLE IRAs are a good fit for small business owners or self-employed individuals who have not set up any other type of work-related retirement plans. Unlike profit-sharing or 401(k) plans, SIMPLE IRAs are easy to set up, administer, and maintain.

Self-employed individuals that plan on bringing on more employees also benefit from SIMPLE IRAs, as adding employees to a SIMPLE IRA is a relatively easy process.

 

SIMPLE IRA Summary Details

Highlights of SIMPLE IRA

• Employees can make contributions to the account

• Easier and cheaper to administer and maintain compared to other retirement plans such as 401(k)s.

• Tax Benefits

Taxation

• Employee and employer contributions are tax deductible

• Investments grow tax deferred within the account

• Distributions in retirement are taxed as ordinary income for the participant

 Employer Eligibility

• Company must have less than 100 current employees

• Cannot have any other retirement plans in place

 Employer Contributions

• Minimum: 2% of employee’s compensation or match 3% of employee’s contributions

• Maximum: $12,500 annually

• If employer elects to make matching contributions, and the employee does not contribute to the plan then the employer will not contribute to the employee’s account.

• Each employee must receive the same compensation plan

 Employee Contributions

• Minimum Contribution: $0

• Maximum Contributions: 100% of compensation up to $12,500 annually

– Wyatt Swartz

– Contributions by Eli Perlmutter

3/23/2017

Sources:

http://money.cnn.com/retirement/guide/IRA_SIMPLE.moneymag/

https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-contributions

http://www.investopedia.com/university/retirementplans/simpleira/