SIMPLE IRA

Background

A SIMPLE IRA (Savings Incentive Match Plan for Employees), per the IRS, is a retirement savings plan for small businesses with fewer than 100 employees. They are much easier to set up and administer than a traditional 401(k) plan. However, contributions are still tax-deferred, meaning the amount you save up to your contribution limit reduces your taxable income for the year. Although they are a small business retirement plan, SIMPLE IRAs have many of the same investment, distribution and rollover rules as a traditional IRA.

SIMPLE IRA

Key Attributes of a SIMPLE IRA

  • Built for businesses with less than 100 employees
  • Easier to set up and administer than a 401(k) plan
  • Contributions are tax deferred
  • Investment growth is tax deferred until retirement distributions begin 
  • Employer contributions are mandatory 
  • Contribution limits are lower than other workplace retirement plans 
  • There is no Roth version available                                        Source: IRS.gov

“Success is not final, failure is not fatal: it is the courage to continue that counts.”

– Winston Churchill

SIMPLE IRA Overview

The name SIMPLE IRA is an acronym where “SIMPLE” stands for “Savings Incentive Match Plan for Employees,” and “IRA” stands for “Individual Retirement Account.” The SIMPLE IRA, according to the IRS, is a retirement savings plan that most small businesses with 100 or fewer employees can utilize. The appeal of SIMPLE IRAs is that they have minimal paperwork requirements, just an initial plan document and annual disclosures to employees. This plan does require that an employer make a contribution into their employee’s account. It does provide a choice to either make a 2% retirement account contribution to all employees or an optional matching contribution of up to 3%.  Employees are immediately 100% vested, meaning there is no waiting period to have ownership of all of the money in the employee account.  

Like a traditional 401(k) plan, contributions are tax-deferred, meaning the amount you save up to your contribution limit reduces your taxable income for the year. Also, investment growth is tax-deferred until you start taking distributions in retirement. One drawback of this plan is that it has a lower annual contribution limit than a 401(k) plan. In 2024 SIMPLE IRA contributions limits are $16,000, and those 50 and over can make an additional $3,500 catch-up contribution. Additionally, under SIMPLE IRAs there is no Roth version available. Also be aware that there are steep early withdraw penalties. Distribution guidance typically follows traditional IRA rules, except for non-qualified withdrawals within the first two years of  participation. For those, you’ll pay an extra 15% early withdrawal penalty on top of the standard 10% penalty. 

Overall, SIMPLE IRAs can be a powerful retirement preparation tool. This plan can help small businesses offer employees competitive benefits, with less of the administration work of a traditional 401(k) plan.