We all know that SIMPLE IRAs are a great way to save for retirement. But what you may not know is that they come with some very specific guidelines. If you’re looking for SIMPLE IRA rules, you have come to the right place. This guide will help you navigate the ins and outs of SIMPLE IRAs and how they work.

What is a SIMPLE IRA?

SIMPLE IRA stands for Savings Incentive Match Plan for Employees. It’s a retirement savings plan designed to encourage small businesses and self-employed people to start saving for retirement. This type of IRA requires very little paperwork on the part of the employer, making it easier to set up than other types of retirement plans.

The SIMPLE IRA is for small businesses with 100 or fewer employees, including full-time and part-time workers. It’s also available to self-employed people who have no employees. 

How Does a SIMPLE IRA Plan Work?

A SIMPLE IRA plan is an individual retirement account (IRA) that allows an employee to make salary deferral contributions to their retirement savings account without having to worry about setting up an individual retirement arrangement. The employer then contributes as well. This means that both the employer and the employee contribute to the retirement savings account of each employee who participates in this program.

SIMPLE IRA Rules

Employees choose to contribute a portion of their salary to their SIMPLE IRA account. The amount they choose will be deducted from their paycheck each pay period—before taxes are taken out. Employees can contribute $13,500 for the 2021 tax year and $14,000 for the 2022 tax year ($16,500 for the 2021 tax year and $17,000 for the 2022 tax year for employees aged 50 and older). All contributions are made pre-tax, so there are no taxes due on them until you withdraw funds from your account upon retirement.

If you are an employer, you can match employee contributions up to 3%. You can also make non-elective employer contributions equal to 2% of the employee’s compensation based on a maximum salary of $305,000 in 2022. Speak to your accountant about salary reduction contributions to empower your staff. 

Who Can Participate?

SIMPLE IRA plans are designed to make it easy for small businesses to offer retirement savings plans, and they are open to all small employers.

In general, all of your employees can participate in your SIMPLE IRA plan, including full-time and part-time employees, seasonal workers, and temporary employees. Employees who have not completed 3 years of service may participate if they receive at least $5,000 in compensation from you during the current or preceding year. 

If they don’t meet these requirements, they may still make voluntary contributions to their own SIMPLE IRAs as long as they are under age 70½ and do not already participate in another employer-sponsored retirement plan like a 401(K).

Who Can Use the Plan?

SIMPLE IRA plans are designed for small businesses with 100 or fewer employees at the beginning of each year who don’t offer any other type of retirement plan. If you choose to offer a SIMPLE IRA plan, you must do so for all eligible employees, including non-resident immigrants.

Employees who are age 21 or older and have worked for you for at least 3 years (or 2 years if they’re age 50 or older) can participate in a SIMPLE IRA plan. Employees who have been employed by you for less than 3 years must wait until they have been employed for 3 years before becoming eligible to participate in a SIMPLE IRA plan.

Assets That Qualify

The assets that can be used to contribute to a SIMPLE IRA are the same as those that can be contributed to a traditional IRA. These include: 

  • Cash
  • Mutual funds
  • Stocks
  • Bonds
  • Exchange-Traded Funds (ETFs)
  • Real Estate Investment Trusts (REITs)
  • U.S. Treasuries and Government Agency Bonds

Withdrawals & Loans

You can withdraw money from your SIMPLE IRA at any time, but you generally have to pay a 10% penalty if the withdrawal is made before you reach age 59½. However, there are some exceptions. You can withdraw funds from a SIMPLE IRA without a penalty if:

  • You become disabled and are unable to work in your current job
  • You become unemployed through no fault of your own
  • You have medical expenses that exceed 10% of your adjusted gross income (AGI)

You can’t take a loan from your SIMPLE IRA. You could, however, borrow money from another source and use it to make a contribution to your SIMPLE IRA. For example, if you were about to retire after 25 years with the same employer and were being offered a lump-sum pension payout of $50,000, you could take out a loan for $50,000 from the bank and use that money to fund your retirement plan.

SIMPLE IRA VS Traditional IRA

Traditional IRA and SIMPLE IRA are two types of retirement plans that allow you to save for your golden years. Both plans offer tax-deferred growth, which means you don’t pay income tax on contributions or investment earnings until you withdraw money from your account. However, there are some differences between these types of IRA accounts:

Traditional IRA

The traditional IRA is an individual retirement account (IRA) that allows you to save for retirement on a tax-deferred basis. You can contribute up to $6,000 ($7,000 if you’re age 50 or older) to a traditional IRA each year. If you earn less than $133,000 ($199,000 if married and filing jointly), you may be able to deduct your contributions on your federal income tax return. Your employer may also offer matching contributions as an employee benefit.

SIMPLE IRA

A SIMPLE IRA is a type of workplace retirement plan that gives employees some control over their contributions and investments. The SIMPLE IRA has fewer administrative requirements than other qualified plans, making it easier to set up and maintain. You can contribute up to $14,000 per year into a SIMPLE IRA if you’re under age 50 (or $17,000 per year if you are 50 or over).

The most significant difference between traditional IRAs and SIMPLE IRAs is that with traditional IRAs, employers don’t contribute anything toward your contributions or earnings while they do contribute up to 3% of your salary with SIMPLE IRAs. So, if you’re looking for an option that will allow you to contribute more money per year than a traditional IRA would allow, then SIMPLE IRAs may be better suited for you.

SIMPLE IRA VS 401(K)

SIMPLE IRA and 401(K) plans are both retirement plans that can be set up by employers. They are similar in many ways, but there are some differences between them.

A SIMPLE IRA is an employer-sponsored retirement plan that allows you to save pre-tax money into an account that will grow tax-free until you use it during retirement. Your employer can also contribute up to 3% of your salary each year. Your contributions are always 100% vested—meaning you don’t have to wait until certain age milestones to claim them.

A 401(K) is also an employer-sponsored plan but with one big difference: You can contribute more than just pre-tax money. You can also make post-tax contributions or even roll over existing 401(K) plans from previous jobs. The catch? You will be taxed on the money when you withdraw it at retirement age.

So, which should you choose? Well, if you are looking for something simple with minimal setup, then go with a SIMPLE IRA. If your company offers one, sign up immediately! 

Establishing a SIMPLE IRA Plan

Before you can set up a SIMPLE IRA, you must obtain an employer identification number (EIN) from the IRS by filing Form SS-4. If you don’t already have an EIN, you will need to apply for one before you apply for your SIMPLE IRA plan. You can find information about applying for an EIN by visiting the IRS website.

Once you have an EIN and have filed Form SS-4 with the IRS, you can apply to offer a SIMPLE IRA plan to your employees by filing Form 5305-SIMPLE. This form must be filed no later than 30 days after the first day of the month in which your employees are eligible to participate in the plan.

The primary advantage of using a SIMPLE IRA is that it is easy to administer and maintain. You don’t have to worry about maintaining complex records or complying with complex regulations because there aren’t any! 

Choosing a Financial Institution

One of the first steps to getting your SIMPLE IRA started is choosing a financial institution to handle your account. Your financial institution will take care of all the paperwork and tax forms, so it’s important that you choose one that will be easy for you to work with.

You can open an account with any bank or credit union in the United States, but some banks may be better suited to your needs than others. You will want to consider how much money they have on hand, how many clients they serve, and what kind of customer service they offer.

Execute a Written Agreement

SIMPLE IRA plans are established by written agreement between an employer and employees, or the employers and their employees’ authorized representatives. The agreement must be signed by the representative of each party to the plan. It may be signed by a representative of an entity that is not an employer, such as a trade union if it represents employees of more than one employer.

The written agreement must specify whether contributions will be made on behalf of all eligible employees or only for those who elect to make contributions. If you want to make contributions on behalf of all eligible employees, you must specify this in the agreement. 

Annual Notice to Eligible Employees

You must provide each eligible employee with an initial year-end notice within 14 days after any calendar year during which they have participated in your SIMPLE IRA plan and at least 90 days before any calendar year during which they may become eligible to participate in your SIMPLE IRA plan. 

This notice will describe their rights under this section and explain how they may make contributions and withdrawals from their retirement accounts during the upcoming year.

Is There a Deadline to Set Up a SIMPLE IRA Plan?

There is no deadline to set up a SIMPLE IRA plan. However, if you want to take advantage of the tax deduction available for contributions made to your employees’ SIMPLE IRA accounts, you must have an established SIMPLE IRA plan by the end of the calendar year in which you want to claim the deduction for those contributions.

Can I Maintain My SIMPLE IRA Plan on a Fiscal-Year Basis?

It depends. The SIMPLE IRA Plan was designed as a calendar year plan, but if your business operates on a fiscal year (e.g., from January 1 through December 31), then you may be able to maintain your plan on that basis instead. 

You can make this change by filing Form 5304 (Application for Change in Plan or Termination of Plan). The IRS will generally accept this form unless it believes that the change would not be in the best interests of participants or beneficiaries.

Is There a Grace Period if the Plan Sponsor Ceases to Satisfy the 100-Employee Limitation?

Yes. If your plan sponsor ceases to satisfy the 100-employee limitation, you can continue to make elective deferrals under the safe harbor during a transition period. The transition period ends when either of the following occurs:

The plan sponsor satisfies the 100-employee limitation again, or you receive notification from your employer that it has ceased to satisfy the 100-employee limitation and that its failure to satisfy this requirement is not due to reasonable cause.

In Conclusion

SIMPLE IRAs can be a great option for small businesses looking to reduce the costs of their retirement plan. For those who are interested in this type of plan, it is important to understand what it is and how it works. Fortunately, it should be easy to navigate the plans effectively with a little information and planning at the outset. Contact us to learn more about the simple IRA rules to help you save for retirement. 

Saving for retirement? Book or contact The Budgetnista or explore more financial resources and tools within the website.

About the Author Tiffany Aliche

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

DID SEEING MY NETFLIX DOC, GET SMART WITH MONEY, BRING YOU HERE?

X
>