If you’re a small business owner, you’re likely looking at retirement plan options for you and your employees. Traditional 401(k)s and other plans offered by big financial institutions are often expensive and complicated, not exactly meeting the needs of smaller companies. The number of options can be overwhelming and picking the right plan is a lot of work, leaving you wondering if you made the right choice for your employees.
One option some small business owners consider is a Savings Incentive Match Plan for Employees (or SIMPLE) IRA. The costs are lower, the process is “SIMPLE”, and the plan allows for employee contributions (unlike a SEP IRA).
When you select a self-directed SIMPLE IRA, you gain greater control over investments— unlocking the potential to invest in almost every asset-type imaginable, instead of being limited to traditional stocks, bonds, and mutual funds. There are so many reasons to consider a Self-Directed SIMPLE IRA for your small business— read on to see if this is the plan for you.
Is a SIMPLE IRA Right for Your Business?
There are requirements that an employer must meet to establish a SIMPLE IRA. They need to meet three conditions:
- Currently have 100 or fewer employers
- Complete Form 5304-SIMPLE or Form 5305-SIMPLE
- There cannot be any other retirement plans currently offered
The administrative costs of establishing and maintaining a SIMPLE IRA are very low compared to other plans. For example, at IRAR we charge only our $100 account opening fee to establish the plan (check out our detailed fees page for more information). They’re easy to setup— aside from our new account paperwork, you only need to complete a 5304-SIMPLE or 5305-SIMPLE to get started.
You must establish your SIMPLE IRA plan between January 1 and October 1 for the tax year in which your qualifying contributions will apply. Contributions are tax-deferred, meaning you can deduct them and don’t pay taxes on your savings until you withdraw it from your account. Unlike a SEP IRA (which only allows employer contributions), a SIMPLE IRA allows the employee to make salary reduction contributions. They can do this through regular payroll deductions.
The employer also generally has no filing requirements with the IRS, IRAR handles the reporting requirements for the plan, leaving less for you to worry over when planning for retirement.
SIMPLE IRA Contribution Limits 2022 - 2023
With a SIMPLE IRA, the contributions are tax-deferred. That means up-front tax breaks and tax-deferred savings, so you don't pay taxes until you withdraw the money from the account during your retirement. Like all IRAs, SIMPLE IRAs have contribution limits. SIMPLE IRA contribution limits for 2022 is up to $14,000 for the year. In 2023 the contribution limit goes up to $15,500.
Like in a Traditional IRA or Roth IRA, if the employee is age 50 or above they are eligible for a catch up contribution. For a simple the catchup contribution is $3,000, bringing to total contribution amount to $17,000 for 2022.
The employer is also responsible for contributing to the SIMPLE account for the employee. The employer must make either an employer matching contribution or a non-elective contribution to the employee IRAs.
This means that the employer is required to either:
Match each employee's salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee's compensation, without any limit, OR
Make non-elective contributions of 2% of the employee's compensation, whether the employee makes contributions or not.
If the employer decides to make the non-elective contributions, they must be made even if the employee decides not to make salary reduction contributions.
SIMPLE IRA Rules and Requirements for Employers
Once the employer has established the SIMPLE IRA plan, they are responsible for distributing an annual notice to eligible employees. Before the employees' 60-day election period (which generally begins on November 2nd prior to each calendar year), the employer must provide to each eligible employee:
- Details about the employee's opportunity to make or change a salary reduction
- The employer’s decision to make either a matching or non-elective contribution
- A summary description (the firm that established the SIMPLE IRA usually provides this)
For an employee to be eligible to participate in the SIMPLE plan, they need to have received at least $5,000 in compensation during any two years preceding the current calendar year and be reasonably expected to receive at least $5,000 for the current calendar year. The two-year requirement doesn’t need to be the immediate two years before the current calendar year in order for the employee to qualify. Example:
Jill has been working for company A for the last 7 years and has earned annual compensation of $34,000.
Since Jill earned more than $5,000 in 2021 and 2022, she would be eligible to participate in the SIMPLE IRA plan. You can decide to have requirements for eligibility that are less restrictive, but not more restrictive, than what is listed above. The IRS has some resources if you’d like more information on the rules and regulations surrounding SIMPLE IRA plans.
The SIMPLE IRA Distribution Process
Distributions from a self-directed SIMPLE IRA work like any other tax deferred IRA, for the most part. They are treated as ordinary income and subject to income tax (and if you are under the age 59 ½, a 10% early withdrawal penalty) when you make a withdrawal.
One difference is if you make a withdrawal within the first two years of participation in the SIMPLE IRA, then the 10% early withdrawal penalty tax increases to 25%. If you’d like to know about distributions from your self-directed IRA, we have some resources.
Things to Remember with Your Self-Directed SIMPLE IRA:
- You must establish the plan by October 1 of the tax year in which your qualifying contributions will apply.
- Employees can contribute to their SIMPLE IRA through regular payroll deductions. The contributions are tax-deferred and the investments in the retirement account can grow tax-deferred until withdrawn at retirement.
- If the employer decides to make the non-elective contributions, you must make them even if the employee decides not to make salary reduction contributions.
- Contributions must be made by the due date (including extensions) of employer's federal income tax return for the year
With an IRAR self-directed SIMPLE IRA, you get all the benefits of saving for retirement combined with the freedom to invest in a wide variety of different investment types. Being able to invest in alternative assets may help you reach your retirement saving goals sooner than you thought. With this ability to truly self-direct your retirement, you can finally start making strides for your financial future.
can finally start making strides for your financial future.
SIMPLE IRA FAQs
What is a SIMPLE IRA?
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a retirement plan for businesses with fewer than 100 employees— the employer and the employee can make tax-deferred contributions. The employer must make either an employer matching contribution or a non-elective contribution to the employee IRAs. The administrative cost are much lower when compared to a 401(k).
Is a SIMPLE IRA a Traditional IRA?
The SIMPLE IRA is not a Traditional IRA but follows the same rules. A SIMPLE is a plan for small businesses and a Traditional IRA is for individuals. In this plan, a tax-deferred account (like a Traditional IRA) is set up for each plan participant.
What is the SIMPLE IRA employer contribution?
The employer contribution to a SIMPLE IRA depends on how the plan was established. The employer has the option to make non-elective contributions of 2% of the employee's compensation (whether the employee makes contributions or not), or match each employee's contribution up to 3% of employee's compensation.