SIMPLE IRA – A Complete Guide
What Is a SIMPLE IRA?
SIMPLE IRA stands for Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account (IRA). A SIMPLE IRA is a tax-deferred, employer-sponsored retirement plan for small businesses with fewer than 100 employees. Employers can make non-elective contributions of 2% of the employee’s salary. Or, employers can choose to match employee contributions up to 3% of their salary.
SIMPLE IRA Eligibility
To be eligible, employers must have 100 or fewer employees. Self-employed individuals and sole proprietors are also eligible. For employees to be eligible, they must have earned at least $5,000 in the last two prior calendar years. They must also earn at least $5,000 in the current year. Employers may make eligibility less stringent if they choose. Employers may also choose to exclude employees that receive union benefits.
SIMPLE IRA Benefits
SIMPLE plans require minimal paperwork. A plan document and annual disclosures provided to employees are sufficient.
Employers’ startup fees and maintenance costs are generally low. This is due to only needing a plan document at the start and annual disclosures.
Employer Tax Savings
Employers may be eligible to receive tax credit for employee contributions they make up to $5,000 per year for the first 3 years of the plan’s inception.
How to Open a SIMPLE IRA
Choose a financial institution that will serve as the trustee to each employee’s SIMPLE IRA plan. Employers may allow employees to choose their own financial institution.
Complete a written agreement to provide benefits to all your eligible employees.
Provide your employees with information about the agreement.
Set up a SIMPLE IRA account for each eligible employee.
Employers can set up a SIMPLE plan effective on any date from January 1 through October 1 of any year as long as they did not previously have a SIMPLE plan.
If you are a new employer starting your business after October 1, you can set up a SIMPLE IRA plan after October 1. If you previously had a SIMPLE IRA plan, you can set up a new one effective January 1 of the following year.
A SIMPLE IRA plan cannot have an effective date before the date in which you adopt the plan.
Investing With a SIMPLE IRA
You can invest your SIMPLE IRA in the investments your account provider offers. Traditional account providers usually offer stocks, bonds, and mutual funds. Self-directed account providers allow you to invest in traditional and alternative investments.
Alternative investments include private placements, futures, real estate, private equity, and more.
Steps to Invest
First, you have to open your SIMPLE IRA account. Next, fund your account via a rollover, transfer, or contribution. Last, select an investment.
You should always consult with a financial advisor or CPA. They will determine which investments are best for you and your retirement goals.
SIMPLE IRA Plan Examples
Example 1 – 3% Matching Contributions
Toby owns Keep Ceramic, a pottery manufacturing company with 60 employees. Toby decides to establish a SIMPLE IRA plan for his employees. He plans to match his employees’ contributions up to 3% of their salaries. With this plan, if a Keep Ceramic employee does not contribute to their IRA, then they do not receive any employer contributions.
Example 2 – 2% Non-Elective Contributions
Lily owns Bark-a-Roo, a boarding kennel & grooming shop with 20 employees. Lily decides to establish a SIMPLE IRA plan for her employees. She plans to make a 2% non-elective contribution to all eligible employees’ plans. With this plan, Bark-a-Roo’s eligible employees receive 2% of their compensation whether they contribute to their plans or not.
SIMPLE IRA Contributions
SIMPLE IRA contribution limits differ from other retirement plans. As of March 2023, you can contribute up to $15,500 of your earned income (+$3,500 in catch-up contributions for those aged 50 and over).
The SIMPLE IRA contribution deadline is January 30 of the following year. You are not required to contribute to your SIMPLE plan in any given year. Learn more about SIMPLE IRA limits on the IRS’s website.
SIMPLE IRA Rules
The IRS provides a SIMPLE IRA plan checklist to help ensure your plan follows the proper rules. Each year, you should review the requirements to keep your plan in compliance.
You do not have to file annual financial reports with the Federal Government for SIMPLE IRAs. Employers do not need to file an annual Form 5500 return. SIMPLE IRA contributions are not included on Form W-2. Employers only need to check box 13 for Retirement Plans on Form W-2.
Contributions are not subject to federal income tax withholding. Salary reduction contributions are subject to Social Security, Medicare, and federal unemployment taxes. Matching contributions and non-elective contributions are not subject to these taxes.
Correcting Operation Mistakes
The IRS has correction programs that help employers with correcting plan errors. These programs protect participants’ interests and keep the plan’s tax benefits. A frequent review of your plan will allow you to find errors faster. Be sure to have these errors corrected as soon as possible.
How to Terminate a SIMPLE Plan
You must maintain SIMPLE IRA plans for a whole calendar year, other than the first year you set up your plan. Once the plan starts, you must continue it for the calendar year. You must also make promised employee contributions.
If you decide to terminate your plan, you may consult with your plan trustee or financial advisor. They will discuss retirement plan options that may work better for you and your business.
To end your plan, you must notify your employees within a reasonable time before November 2. Inform them that the plan will no longer be effective as of the following January 1. This gives your employees time to find another retirement plan option if they choose. Then, notify the plan trustee.
Keep records of your plan’s termination. You do not need to notify the IRS of your SIMPLE IRA plan termination.
Example: A company decides on November 27, 2023, to terminate its SIMPLE IRA plan. The earliest effective date for the termination is January 1, 2025. The company must notify its employees of this intention before November 2, 2024.
Which Retirement Plan is Right for My Small Business?
If you are unsure if a SIMPLE IRA is right for your small business, there are other options to consider. Read our article “Retirement Plans for Small Business Owners.” This article compares SEP IRAs, SIMPLE IRAs, and Individual 401(k)s.
About Midland Trust
The Midland umbrella of companies is a leading custodial services provider. We focus on self-directed IRA accounts, 1031 exchanges, and private fund custody services. Midland has been in business since 1994. We focus on providing clients with opportunities to defer or eliminate taxes. Midland has thousands of satisfied clients and billions of dollars in assets under administration. We have the experience and knowledge to assist clients with their financial goals.