Many small employers use SIMPLE IRAs to help them provide retirement benefits for their workers. Every year, the limits on what employers and employees can contribute toward a SIMPLE IRA are subject to change, but over the past year, the rate of inflation has been relatively subdued. That means that most of the limits on SIMPLE IRAs won't change from 2016 levels, but there's one area that might affect high-income workers. Below, we'll discuss SIMPLE IRAs and the limits on contributions for 2017.
2017 SIMPLE IRA employee contribution limits
The "SIMPLE" in SIMPLE IRA is an acronym that stands for savings incentive match plan for employees. The SIMPLE IRA essentially serves as a retirement savings account for self-employed workers and employees of small businesses to set money aside for retirement without employers having to set up more complicated employer-sponsored retirement plans, such as 401(k)s.
Under the SIMPLE IRA rules, employees can contribute up to a certain amount each year. For workers under age 50, the basic ceiling is $12,500. For those who are 50 or older, a $3,000 catch-up contribution is available, taking the total maximum up to $15,500.
In addition, employers are required to make contributions on behalf of workers who participate in the SIMPLE IRA plan. Employers have two options they can choose from to determine how much they'll have to contribute. First, they can match their employees' contributions dollar for dollar up to a maximum of 3% of each employee's salary, without any limit. Alternatively, they can make a contribution of 2% of each employee's salary regardless of whether the employee makes contributions or not, up to a maximum of $5,400 in employer contributions. That final maximum is the one area where SIMPLE IRA rules will change for 2017, as the 2016 amount was $5,300. However, the change will only affect those making $265,000 or more in 2017, with the new limit on compensation for the 2% option rising to $270,000.
Why SIMPLE IRAs are attractive
Those who are familiar with retirement plans will note that the limits on SIMPLE IRAs are lower than what you'd find with a 401(k) plan or some other retirement plan options. Given that, some might wonder why a SIMPLE IRA makes sense for those trying to maximize their retirement savings.
The main advantage of the SIMPLE IRA, as its name suggests, is its simplicity. Creating SIMPLE IRAs is far easier than building a full-blown 401(k) plan for a small business, because SIMPLE IRA reporting and administrative duties are minimal. For the most part, financial institutions will handle SIMPLE IRAs in a way that's similar to a regular personal IRA or individual brokerage account, with just a few extra forms to recognize the nature of the SIMPLE IRA. For employers, the main task is coordinating deposits into employee SIMPLE IRAs to make sure they comply with requirements to make contributions promptly.
For self-employed workers, a SIMPLE IRA also has the benefit of letting you make both employer and employee contributions on your behalf. If you use the 3% matching rule, that can let you save up to $25,000 for those under 50 or $31,000 for those 50 or older, if your income level is high enough to produce that large an employer contribution. Note, however, that if you later bring on outside employees for your business, you can't just limit the SIMPLE IRA to yourself. You'll also have to let your employees participate as well.
SIMPLE IRAs aren't changing much in 2017, and they remain a valuable way for small businesses and self-employed workers to save for retirement. If you need an easy-to-implement retirement plan for your business, a SIMPLE IRA is worth a closer look.