How SIMPLE is a SIMPLE IRA?

 

You don’t have to run a large company to offer a retirement plan to your employees. Small employers can save for retirement as well by offering SIMPLE IRA plans.

The Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan was created in 1997. It is one of the ways a small employer can offer the benefit of a retirement plan. The SIMPLE retirement plan consists of a deferral program for employees and mandatory contributions for employers. This way, your smaller team still receives all the savings benefits they need for retirement.

Any business entity meeting the following criteria can establish a SIMPLE IRA Plan:

• The SIMPLE Plan must be the only retirement plan.
• The business has no more than 100 employees earning $5,000 or more.

If a business ever exceeds the 100-employee limit, they can continue to fund the plan for two years.

Maximum Employee Eligibility SIMPLE IRA Requirements:

• Employees earned $5,000 or more in the past two years.
• The employee is reasonably expected to continue to earn $5,000 or more per year.
• Employers may exclude employees who participate in another plan through a collective bargaining agreement.

The employer can use less restrictive guidelines, but not stricter ones.

Contributions to a SIMPLE Retirement Plan

The maximum employee contribution for 2023 is:

• $15,500 if under age 50
• $19,000 if over age 50

The employee can defer a percentage of income or a dollar amount.

The employer deferral amount is one of the three options:

• Dollar for dollar match up to 3% of compensation’
• Only employees who contribute can receive the match
• Compensation caps to not apply.

Why choose a SIMPLE IRA?

SIMPLE retirement plans provide a convenient alternative for small employers who don’t want the bureaucratic and fiduciary complexities that come with a qualified plan. As a result, employees still get tax and savings benefits, plus instant vesting of employer contributions. Plus, it’s a great way to help you and your staff save for retirement. Review the requirements for operating a SIMPLE IRA on the IRS’s website HERE.

Deadline to establish a SIMPLE IRA

Say you want to make a savings incentive match plan for employees effective for a particular tax year. If that’s the case, set it up by October 1 of that year. A later date is allowable only if the business is started after October 1, and the SIMPLE retirement plan must be set up as soon as it is administratively feasible.

Transferring your SIMPLE IRA

Employees must wait two years from the time they open a SIMPLE retirement plan before transferring those funds into another retirement plan. If you withdraw money from a SIMPLE IRA during the two-year waiting period, you may be subject to a 25% early-distribution penalty.

You should always discuss with your own tax advisor as to what is the best option for you regarding a retirement plan. Feel free to call us at 714-831-1866 or email us at info@uDirectira.com to discuss any questions you may have.