What is a SIMPLE IRA?

Are you an employer or decision-maker at a small business and want a better way to help provide a retirement benefit than providing a 401(k) with high administrative and maintenance costs? If so a Simple IRA account may be for you.

A Simple IRA is an employer-funded retirement plan (like 401(k) and 403(b)) created especially for small businesses. This article will discuss what exactly a Simple IRA is, some benefits of a Simple IRA, and why an employer would want to provide the option of the Simple IRA for their employees.

Simple IRA in a Nutshell:

A Simple IRA is an employer-funded IRA that is funded with a combination of employee contributions and an employer match or flat benefit.

Employees are able to contribute to the Simple IRA using a pre-tax salary reduction, in 2019 up to $13,000 a year (or $16,000 if over the age of fifty). This reduction acts in the same way a 401(k) contribution does in that the income that is contributed is taken out before income tax is calculated against the employee. The contributions to the Simple IRA are not taxed for any income tax purposes until an employee takes a distribution from the plan. Unlike a 401(k), employee contributions in a Simple IRA are still subject to Social Security, Medicare, and federal unemployment taxes.

The next portion of a Simple IRA consists of the employer contribution. Employers have two primary options: a dollar for dollar match of up to 3% of an employee’s salary or a flat 2% contribution.

Simple IRA Employee Limits:

The Simple IRA was created in order to help small businesses provide competitive retirement benefits to employees while keeping compliance costs low. As a result, Simple IRAs are only available to business with fewer than one-hundred employees. The Simple IRA regulations allow solo proprietorships and partnerships to take part in the system as well. This allows a tax-advantaged retirement system to the smallest of businesses that would have no real option for tax-advantaged retirement savings otherwise.

Simple IRA Benefits:

For employers, the Simple IRA has several benefits. First, the plans are easy to administer compared to a 401(k) and both the start-up and maintenance costs are much more manageable as well.

The Simple IRA can offer smaller employers a competitive option to larger benefit packages. This tax advantaged program opens the door to providing a tax-advantaged retirement savings account for employees that would be cost-prohibitive under other options.

For employees, the Simple IRA also provides a couple of major benefits. First, since yearly contributions by employees are not mandatory to keep the account after setup, an employee can decide how much, if any of their income is diverted to the Simple IRA in any year depending on their circumstances. Secondly, since the contributions are not taxed, an employee can receive additional tax-deferred compensation from an employer as a result of the employee match.

The Simple IRA is a tax-advantaged employer-funded retirement savings options for your employees, whether you have one employee or ninety-nine. It’s minimal compliance and operational costs provide a good option for retirement savings for employer to provide such a benefit to their employees that would not be available otherwise.