What is a SIMPLE IRA?
The SIMPLE IRA is an employer sponsored retirement plan available to small businesses with less than 100 employees including sole proprietorships, partnerships, S corporations and C corporations.
SIMPLE IRA's consist of 2 parts: an optional employee salary deferral and a mandatory employer match. SIMPLE IRA's are easy to administer and IRS filings are not required. SIMPLE IRAs must be established by October 1st in order to contribute to a plan for the current year.
With a SIMPLE IRA, eligible employees can elect to contribute by salary deferral (like a 401k plan). In 2019 employees can elect to defer up to 100% of their income up to a maximum of $13,000 or $16,000 for those age 50 or older. SIMPLE IRA participants age 50 or older are permitted to make an additional $3,000 catch-up contribution. In general, contributions made by an employee are 100% tax deductible and investment earnings grow tax deferred and can be withdrawn after age 59 ½. Withdrawals prior to age 59 ½ are likely to incur taxes as well as IRS penalties for premature withdrawal.
Employers must make mandatory contributions into a SIMPLE IRA on behalf of their eligible employees and into their own SIMPLE IRA account. In general, employer SIMPLE IRA contributions made into these accounts are 100% tax deductible. Contributions must be made annually by the employer's tax filing deadline (including extensions).
Employer contributions can be made in one of the following ways:
A 3% employer match is made only for those employees electing to defer a portion of their salary. Employers match employee salary deferrals dollar for dollar up to 3% of employee compensation. An employer can reduce the employer's match to 1% of each participating employee's compensation for any two years in a five year period.
A 2% employer contribution based on an employee’s compensation (up to $5,600 in 2019) for all eligible employees regardless of whether the employee is electing to defer a portion of their salary or not.
SIMPLE IRAs are very inexpensive to maintain and their costs vary, but may cost approximately $15-$25 annually per employee account.
Note on the SIMPLE IRA:
Employers who would like to sponsor a retirement plan, but who do not want to make contributions to employees’ accounts may want to consider a 401k. A business owner with employees must weigh the SIMPLE IRA’s benefits of low administrative fees, but the requirement of the employer match versus a 401k which has much higher administrative fees, but does not require an employer match. Contact us if you need clarification.
Are you self employed and have no W-2 employees?
If you are then you should consider a Solo 401k as an alternative to a SIMPLE IRA. Self employed individuals who would like to contribute in excess of the limits of a SIMPLE IRA should consider a Solo 401k since it has higher contribution limits. Learn more about the Solo 401k contribution limits.