A SIMPLE IRA is the small-company version of a retirement plan that is subject to many of the same rules as traditional IRAs. This workplace retirement savings account allows eligible employees to invest a portion of their pretax salary into an individual account and receive mandatory employer contributions. These employer contributions (either 100% of an employee’s first 3% or 2% regardless of what the employee contributes) are 100% vested from day 1 and are deductible to the employer for tax purposes.
There are unique characteristics of a SIMPLE IRA that may or may not make it the right retirement plan for a company:
- The business can not have more than 100 employees to contribute
- Employees reasonably expected to earn at least $5,000 in compensation during the calendar year and who have earned at least $5,000 from the employer in any two preceding calendar years are eligible for the plan
- The maximum contribution limit for an employee is $13,500 (people age 50 and older it is $16,500)
- Like a 401(k), withdrawals before age 59 ½ may be subject to a 10% penalty for early withdrawal. Unlike 401(k)s, they have a 25% penalty on withdrawals in the first two years.
- The employer may not run any other retirement plan in conjunction with a SIMPLE IRA
- Many investment platforms for running a simple IRA.
So why would a company want to set up a SIMPLE IRA? There are many reasons including:
- Easy to establish and maintain
- Pretax contributions may reduce employee’s taxable income
- No discrimination testing
- No administration costs for the employer
All of these things make it easier for an employer—they are able to focus on what they do and spend less time on administering and running their retirement plan.
Interested in finding out more? Contact us today.