A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement plan that allows small businesses with 100 or fewer employees to offer a retirement savings option to their employees.
Here’s how a SIMPLE IRA works:
- The employer sets up a SIMPLE IRA plan and employees can choose to participate by making pre-tax contributions through payroll deductions.
- The employer must make either a matching contribution of up to 3% of the employee’s salary or a non-elective contribution of 2% of the employee’s salary, regardless of whether the employee makes contributions.
- The maximum employee contribution limit for 2021 is $13,500, and employees aged 50 and over can make an additional catch-up contribution of $3,000.
- Contributions and earnings in a SIMPLE IRA grow tax-deferred until withdrawn in retirement. Withdrawals are taxed as income and may be subject to a 10% penalty if taken before age 59 1/2.
One benefit of a SIMPLE IRA is that it is relatively easy and inexpensive for employers to set up and administer compared to other types of retirement plans. Additionally, employees have the flexibility to choose their contribution amount, and employer contributions can provide a valuable incentive for employees to participate in the plan.
However, there are some limitations to a SIMPLE IRA. The contribution limits are lower than other types of retirement plans, and the plan is only available to businesses with 100 or fewer employees. Additionally, employers must make contributions to the plan each year, which can be a disadvantage during times of financial hardship.
Overall, a SIMPLE IRA can be a good option for small businesses looking to offer a retirement savings option to their employees.
Why get one?
Here are some reasons why small business owners may choose to establish a SIMPLE IRA:
- Employee benefits: Offering a SIMPLE IRA can be an attractive benefit for employees and can help attract and retain top talent. It also shows that the employer cares about their employees’ financial well-being and encourages them to save for retirement.
- Tax benefits: Contributions to a SIMPLE IRA are tax-deductible for employers, reducing their taxable income. Employees’ contributions are made on a pre-tax basis, reducing their taxable income as well.
- Low administrative costs: SIMPLE IRA plans are relatively easy and inexpensive for employers to set up and administer compared to other types of retirement plans.
- Matching contributions: Employers have the option to match employee contributions up to a certain percentage of their salary, which can provide a valuable incentive for employees to participate in the plan.
- Flexibility: Employees can choose how much they want to contribute to their SIMPLE IRA, up to the annual contribution limit. This provides flexibility for employees who may have varying financial situations.
Overall, a SIMPLE IRA can be a good retirement savings option for small businesses looking to provide their employees with a valuable benefit while also receiving tax benefits.
Before deciding on whether to establish a SIMPLE IRA, it’s essential to carefully consider all the advantages and disadvantages and seek guidance from a financial advisor to make an informed decision.