What is a Simple IRA? If you’re a business owner, you may have already heard this term before. A Simple IRA is a retirement plan allowed for by the tax code for businesses that has some added benefits over the IRAs available to individuals. Anyone who does not have a retirement plan set up through an employer may contribute $5,500 to either a Roth IRA or a Traditional IRA (see this article for details on both types).
A Simple IRA can be set up for almost any business with less than 100 employees, and it has the following benefits and stipulations:
- 12,500 can be contributed by each employee
- All $12,500 can either be considered a Roth or Traditional contribution
- The employer must either match up to 3% of each employee’s salary contributions (if an employee makes 100k you must match up to 3k that they put in) or the employer must put in 2% for every employee regardless of what is contributed by the employee
- The employer contribution is capped at $12,500 if matching up to 3% and $5,400 if putting in 2%
- The amounts contributed for employees is a deductible business expense
- Owners may contribute to their own plans from the business the same way that they do for employees, but it is deductible on the 1040 tax return (no self-employment tax benefit)
- Every employee and owner has to be on the same employer contribution plan (either matching 3% or an automatic 2%)
- Businesses are allowed to temporarily decrease the amount contributed for all employees due to economic hardship
- Contributions to employee plans must be made at specified intervals that must be adhered to in order to maintain the Simple IRA treatment
Basically a Simple IRA is in between a full blow 401k and the IRAs available to individuals. It allows for more to be contributed than the normal IRAs (12,500 vs. 5,500) but less than a 401k (12,500 vs, 18,500). A Simple IRA does not have the stringent filing requirements of a 401k plan, hence the “Simple” name.
Overall the Simple IRA provides employers with a great way to provide retirement benefits without the hassle or large expense of setting up a 401k. If you are interested in setting up a Simple IRA, contact a Financial Advisor that specializes in retirement plans or check out some of the options provided online. Here is a link to the Vanguard Simple IRA page.
