A SIMPLE IRA is a retirement savings plan that's intended for small businesses and self-employed individuals and allows for employee contributions and an employer match. This retirement savings option is easy to open and maintain and has benefits such as tax-deferred retirement saving with higher contribution limits than a traditional IRA.
What is a SIMPLE IRA?
SIMPLE stands for "savings incentive match plan for employees," and IRA stands for "individual retirement arrangement." Put all of that together, and a SIMPLE IRA is a retirement savings account designed to allow small business owners and self-employed individuals who don't have access to other plans, such as a 401(k), to save for retirement.
Employees can contribute a portion of their salary to the account, and employers must choose one of two ways to make their matching contributions (hence the "M" in SIMPLE). They can either:
- Match employees' contributions, up to a maximum of 3% of the employee's compensation.
- Contribute a fixed rate of 2% of every employee's compensation, regardless of whether they participate.
If you're self-employed, you're considered to be both the employer and employee for contribution purposes.
Employer and employee contributions are immediately fully vested, and money deposited into a SIMPLE IRA can be invested just like funds in a traditional or Roth IRA. In other words, employees can invest for their retirement with virtually any stocks, bonds, or funds they choose.
SIMPLE IRAs are easy to establish, as the name implies, and doing so generally requires filling out a form or two. Most major brokerages offer SIMPLE IRAs, and employees can manage their investments directly through the chosen brokerage.
How much can be contributed?
Employees are allowed to contribute up to $12,500 to a SIMPLE IRA for the 2016 and 2017 tax years, or 100% of their compensation, whichever is lower. If they're 50 or older, there's an additional $3,000 catch-up contribution allowed.
As I mentioned, employers have two choices. If they choose the 3% method, the maximum contribution is only limited by how much the employee contributes. So if an employee is over 50 and earns over $516,667 for the year, the maximum SIMPLE IRA contribution possible is $31,000 for 2016 or 2017.
On the other hand, if the employer chooses the 2% option, the IRS sets a maximum income amount this can be based on. For 2016, the maximum 2% match is based on up to $265,000 in compensation, and for 2017 this figure will rise to $270,000. That translates to maximum possible employer contributions of $5,300 and $5,400 in 2016 and 2017, respectively.
Employee contributions must be deposited within 30 days after the end of the month in which they would have been paid to the employee, and employer matching contributions can be deposited as late as the tax year's filing deadline, including extensions.
The bottom line on SIMPLE IRAs
The SIMPLE IRA is one of the major retirement plans available to small-business owners and the self-employed. The SEP IRA is another option available, and self-employed individuals have the additional option of an individual or solo 401(k). Of course, this is in addition to the traditional and Roth IRAs that are available to most American workers.
So while a SIMPLE IRA can be a great retirement saving option, with higher contribution limits than a traditional or Roth IRA and more investment options than most employer-sponsored retirement plans, it's important to consider all of your options before making a decision for you and/or your employees.