Simple IRA Plan| Definition, How it Works, Contribution Limits 2024 (2024)

What Is a SIMPLE IRA Plan?

A SIMPLE IRA Plan (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement plan designed for small businesses in the United States. It allows both employees and employers to contribute to individual retirement accounts with simplified rules and contribution options. This plan provides a convenient and accessible method for small employers to help their employees save for retirement while enjoying potential tax advantages

A SIMPLE IRA has an employer matching incentive built-in. The employer can either match the employee contributions, up to 3% of the employee’s salary, or the employer can make contributions of a flat 2% of the employee salary, whether or not the employee chooses to participate in the plan.

A SIMPLE IRA is similar to a 401(k) plan. The contributions made to this plan are with pre-tax dollars, and the money grows tax-deferred in the plan until the money is withdrawn at retirement.

How Much Can I Contribute to a SIMPLE IRA Plan?

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  See Also

  F-Tag Help -- F689 Free of Accident Hazards/Supervision/DevicesSIMPLE IRA Plans - FidelityIRS Form 5304-SIMPLE vs. Form 5305-SIMPLE: Which to Choose for SIMPLE IRA Setup? - Prosperpinnacle

  Employees can contribute up to 100% of compensation, up to a maximum of $16,000 for 2024, $15,500 for 2023 or $14,000 for 2022. The maximum contribution increases periodically to account for inflation. If the employee is 50 years or over, the maximum contribution is up to $19,500 in 2024, $19,000 in 2023 and $17,000 in 2022.

Who Can Open a SIMPLE IRA and who is eligible for a SIMPLE IRA Plan?

How Does a SIMPLE IRA Work?

The SIMPLE IRA plan offers small employers a straightforward approach to contribute to both their employees’ and their own retirement savings. Workers have the option to contribute a portion of their salary, while the employer is obligated to make either matching or nonelective contributions.

A SIMPLE IRA is fundamentally different from a traditional IRA or Roth IRA.
While the latter IRAs are established by employees for themselves, with different plan rules, annual contribution limits, and purposes, a SIMPLE IRA is more like a 401(k), but it’s easier for the company to open and manage it.

Employers are free from complex federal reporting requirements, and they can set up a SIMPLE IRA through a financial institution, which operates it.

The IRS allows employers/self-employed with fewer than 100 employees earning at least $5,000 in the preceding year to open up a SIMPLE IRA.

Like a traditional retirement plan, the employees are allowed to get their wages deducted from their paycheck to contribute to a SIMPLE IRA.

Employers have to contribute to their employees’ SIMPLE IRA accounts, but they have two options:

• Match employees’ contributions, up to 3% of employees’ earnings.
  OR
• Make nonelective contributions of up to 2% of employees’ compensation up to the annual compensation limit of $345,000 for 2024 & $330,000 for 2023.

What Are the Advantages and Drawbacks of a SIMPLE IRA?

Advantages of SIMPLE IRA from the perspective of employers:

• The cost of starting up and operating a SIMPLE IRA is usually lower than setting up a 401(k) plan.
• Employers get a tax deduction for the contributions they make to their employees’ accounts.

Drawbacks of SIMPLE IRA from the perspective of employees:

• With a SIMPLE IRA, employers must contribute to employee accounts.
• The eligibility requirements for an employee to participate in the plan are low. You are eligible if you have had the compensation of at least $5,000 during any two preceding calendar years, and you expect to earn at least the same amount during the calendar year of participation. Even if the employees don’t meet the standards, the IRS may allow employers to offer these accounts.
• If the employer chooses the nonelective 2% contribution option, employees don’t have to go for salary deferrals to get employer contributions. If the employer chooses the elective salary reduction/matching method, the employee must contribute to get the match.
• Employer contributions are vested immediately. Because there is no vesting period, you can own 100% of your money in your SIMPLE IRA.
• SIMPLE IRA offers more investment choices than a 401(k). You can choose to invest in stocks, mutual funds, bonds, and any other investment vehicles offered by the IRA provider.
• You can contribute to other retirement savings plans while being invested in a SIMPLE IRA.
• While you can’t deduct your SIMPLE IRA contributions on your tax returns, these contributions are not reported as income. This means you are able to contribute with pre-tax income.
• Earnings can grow tax-free until they’re withdrawn.

Don’t fall in love with the idea of opening a SIMPLE IRA. Not yet.

Consider some of its disadvantages:

• The contribution limits are lower than other employer-sponsored retirement plans.
• There is no Roth version of the SIMPLE IRA. So, it’s a big drawback considering the benefits a Roth has to offer.
• You cannot take a loan from your SIMPLE IRA.
• Similar to traditional IRAs, early withdrawals from a SIMPLE IRA attract a steep tax penalty. However, for non-qualified withdrawals done within the first two years of your participation, you’ll be charged a standard 10% penalty, and over and above, there will be an extra 15% early withdrawal penalty. This means that if you withdraw the money from a SIMPLE IRA before you turn 59 ½ years, and before you’ve had the plan for two years, you’ll be charged a penalty of 25% of the money you withdraw. Plus, the income tax.
• Rollovers to other employer-sponsored retirement plans or other IRA are subject to strict rules. The 25% penalty (mentioned above) is applicable even if you do a rollover into anything other than another SIMPLE IRA before the two-year period of plan participation.
• A SIMPLE IRA falls under the IRS’s required minimum distributions (RMDs) rules. This means you must withdraw funds from your SIMPLE IRA when you reach a certain age. The newly implemented SECURE Act has raised the age for RMDs to 72 years.

How to Establish a SIMPLE IRA?

Opening a SIMPLE IRA

Most IRA providers offer SIMPLE IRAs that you can establish online. The process of opening a SIMPLE IRA is similar to opening a traditional IRA. But, if you are a business owner, you need to meet additional reporting requirements and submit relevant documents to set up the plan.

For employers or solo business owners, the IRS outline these steps for setting up a SIMPLE IRA plan:

• Choose the type of SIMPLE IRA plan you want by filing either IRS Form 5304-SIMPLE (if your employees are allowed to choose a financial institution for the account) or IRS Form 5305-SIMPLE (if you’re depositing your contributions at a designated financial institution).
• Inform eligible employees about the SIMPLE IRA plan.
• Use Form 5305-S or Form 5305-SA to establish a separate SIMPLE IRAs for each eligible employee.
• If you are an employee at a company that offers a SIMPLE IRA, your employer will fill out one of the forms mentioned above and set up your account.

Other points to consider:

• Employees have to complete a SIMPLE IRA adoption agreement to open their individual accounts.
• Once the plan is set up, employers have to contribute to it each year unless the plan is terminated. However, employers can choose between a 3% matching contribution or a 2% mandatory contribution.

What are the SIMPLE IRA Rules?

Just like other employer-sponsored retirement plans, SIMPLE IRAs are covered under ERISA (Employee Retirement Income Security Act).