What Exactly Is a SIMPLE IRA?
Employer-sponsored retirement plans come in a variety of flavors. One that may appeal to small businesses and self-employed individuals is the savings incentive match plan for employees (SIMPLE), which is simple to set up and administer and allows employers to deduct contributions.
SIMPLEs may be established by small firms with fewer than 100 employees (who earned at least $5,000 in compensation during the preceding year) and no other retirement plans. They can be established as individual IRAs or as part of a qualified cash or deferred compensation arrangement, such as a 401(k) plan. They are typically organized as SIMPLE IRAs.
Each year, eligible employees (those who earned at least $5,000 in remuneration in the two years preceding the current calendar year and expect to earn at least $5,000 in the current calendar year) can contribute pre-tax to their plans. In 2022, participants may pay 100% of their salaries up to $14,000. Individuals who turn 50 or older during the year may elect to pay $3,000 in catch-up contributions in 2022. These values are adjusted for inflation on an annual basis. SIMPLE 401(k) plans may also permit Roth contributions by employees.
SIMPLE IRA administrators are required to make either matching contributions equal to employee contributions (up to 3% of an employee's salary) or non-elective contributions, which establish a flat 2% contribution rate for all eligible employees. Employees are immediately fully vested in employer contributions and often manage their own portfolios.
Distribution requirements are similar to those found in the majority of IRA plans. Withdrawals are taxed as regular income and are subject to a 10% federal income tax penalty if made before reaching the age of 59½ unless an exception exists. Minimum distributions are also often required to begin after the participant reaches the age of 72.
Additionally, there is a two-year waiting period for SIMPLE plan contributions to be transferred to another IRA on a tax-deferred basis after the employee enrolls in the plan. Withdrawals made during the first two years of an employee's plan participation are subject to a 25% tax penalty on top of ordinary income taxes. After the first two years, withdrawals prior to the age of 59½ are normally subject to a 10% early withdrawal penalty. Of course, the IRS occasionally makes exceptions in unusual cases.
SIMPLE IRAs may be a suitable option for small business owners because the employer and employee share responsibility for funding the plan. Additionally, startup and maintenance costs may be cheaper than those associated with other eligible plans. If you're debating whether to establish a retirement plan for your business, keep it SIMPLE.
Speak with one of our financial professionals to learn more about SIMPLE IRA and if it would work for you and your business!
The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investment goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.