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SIMPLE IRA Plan For Small Businesses

When it comes to small business retirement plans its important to know what type of retirement benefit plan my fit your business. Many factors go into deciding what's right for you and your team. Here we will go over what a SIMPLE IRA is and how it works.

Some Pros and Cons Of The SIMPLE IRA

Pros

  • Attract and retain key employees
  • Low cost to setup and maintain plan
  • Make a matching contribution for employees
  • Contributions are deposited pretax
  • Can invest deposited dollars for retirement
  • No IRS quarterly filing requirements
  • Can begin making withdrawals without penalties at age 59 1/2
  • Participants can Rollover old 401k plans into their SIMPLE IRA 

Cons

  • 10% early withdrawal penalty (under 591/2 years old. 25% if made within 2 years of opening the account.
  • 100 employee maximum, after which, a 401k plan will be required
  • Required minimum distributions begin at age 72
  • Participant loans are not allowed
  • Rollovers to anything but another SIMPLE IRA my be treated as a withdrawal within 2 years of account opening
  • No Roth option for SIMPLE IRAs
<strong>What Is a SIMPLE IRA?</strong>

What Is a SIMPLE IRA?

A SIMPLE IRA or Savings Incentive Match Plan for Employees is a retirement benefit plan designed for small business owners with 100 employees or less. The plan is a low cost, easy to maintain and manage alternative to a 401k.

A SIMPLE IRA is a retirement account that can only be opened when working at a company that sponsors the plan, similar to a 401k or other qualified retirement plan. Employers can elect to "match" a portion of their employees contributions up to a certain percentage (usually 1-3%). Alternatively the employer can choose to make a non-elective 2% contribution to all eligible employee accounts.

Accounts can be opened in various places: financial institutions, banks, investment banks, etc. Many employers use a SIMPLE IRA because they are easy to set up, low cost to maintain, and may attract and retain employees.

<strong>How Does A SIMPLE IRA Work?</strong>

How Does A SIMPLE IRA Work?

Employees wanting to participate in the plan can elect to have a portion of their pay contributed to their SIMPLE IRA account usually held at a financial institution or bank. The employer would then match a percentage of their paycheck that they contributed, dollar for dollar, up to 3% and deposit the funds into the same account. All dollars are immediately vested to the employee and the employee can invest those dollars as they would like. The funds are tax deferred as they go into the account and would not be taxed until the funds are withdrawn. 

As with other retirement accounts, there is a limit to how much can be contributed to the SIMPLE IRA. For the year 2020, contribution limits are $13,500 from the employee (employer match not included). If you are 50 years or older you can contribute an additional $3,000 for a total of $16,500. There are also early withdrawal penalties if the funds are withdrawn before 591/2. An additional penalty of 15% may be assessed if funds are withdrawn within the first 2 years of the account opening.

Additional Features of the SIMPLE IRA

Setting up a SIMPLE IRA plan is very easy. Once an employer decides they would like to offer the plan they must notify their employees and give them 60 days to evaluate their option. The plan must be dated no later than October 1 to be able to contribute for that calendar year.

There are two basic versions of the SIMPLE IRA:

  • 5305 SIMPLE IRA Plan: the employer gets to pick the financial advisor/institution that all employees must use.
  • 5304 SIMPLE IRA Plan: the employees can choose their own financial advisor/institution and provide banking information to the employer.

Once the plan option is chosen and the 60 days are through, employees can begin making regular pretax payroll deductions from their check and have it deposited to their account. The employer can choose how often changes can be made to the amount of the deductions, from day to day or monthly, quarterly or even yearly. Employers can also elect to stop allowing someone from participating in the plan for a calendar year if they stop contributions at any time in the year. Additionally the employer may choose to match 1% or 2% for 2 of any 5 year periods. 

When considering a retirement plan for your business its important to know the different types of retirement plans available and their rules to know which one might fit your business. Talking to a financial advisor can help you navigate the different. If you have any questions or would like to see if a SIMPLE IRA is is right for your business, contact us today.

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This information is not presented to give an specific investment or plan advice and is for general information purposes only. 

1. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan 

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