It’s no secret that saving for retirement becomes more challenging when you’re self-employed or work for a small business. However, the federal government has created some tools that can make it easier to plan your financial future.
One of the options you can find today is the SIMPLE (Savings Incentive Match Plan for Employees) IRA.
Are you looking for an easy way to save for your golden years? A SIMPLE IRA could be the ideal retirement plan if you’re a self-employed individual or a small-business employee. While there are many alternatives to saving for the future, these accounts offer unique benefits, such as tax advantages and lower start-up or annual costs.
Let’s explore the most important aspects of SIMPLE IRAs, including these accounts’ main characteristics and features, their purpose, the benefits they offer, and more. Read on!
Understanding SIMPLE IRAs
Before diving into Simple IRAs, we would like to address that it is important to understand what an IRA is. Once you understand individual retirement accounts in general terms, a SIMPLE IRA will be very straightforward to comprehend.
A SIMPLE IRA is a plan that can help small business owners and their employees or those who work for themselves save for retirement by allowing them to make contributions while offering them tax benefits. However, there are many other things you should learn about these accounts.
Definition and Purpose of a SIMPLE IRA
As mentioned above, SIMPLE stands for Savings Incentive Match Plan for Employees. Also, IRA is short for Individual Retirement Account. What does this mean?
At its core, a SIMPLE IRA is a retirement plan, which means it has been designed to help individuals save for their golden years. However, this surely isn’t the first time you’ve heard about accounts that allow you to save for the future. The truth is that there are many alternatives!
What makes a SIMPLE IRA different? – Well, these plans are tax-deferred and are available for self-employed people and small businesses that want to contribute to retirement accounts set up for employees.
The Internal Revenue Service (IRS) describes SIMPLE IRAs as ideal start-up retirement savings accounts for small employers who don’t sponsor another retirement plan.
SIMPLE IRAs are often considered employer-sponsored retirement plans, such as the 401(k) since employer contributions are mandatory. However, these accounts have certain characteristics that make them more similar to traditional IRAs, since their rules are different.
Historical Context of SIMPLE IRA
The history of IRAs dates back to the 1970s when the Employee Retirement Income Security Act (ERISA) was passed by Congress, implementing the Individual Retirement Arrangement to offer a tax-advantaged retirement plan to people working for companies that could not provide a pension plan.
Many things changed over time, and more alternatives to save for retirement were created.
It was not until 1996 that the SIMPLE IRA emerged with the Small Business Job Protection Act. This plan was designed to encourage more employers to sponsor IRAs to assist their employees with their retirement savings.
Although SIMPLE IRA contribution limits were more restrictive, the 1996 Small Business Job Protection Act increased the amount that holders could contribute to Spousal IRAs from $250 or $2,000 (the annual limit at the time).
According to the latest reports from the Bureau of Labor Statistics, 15 million people, or 10.1% of the country’s workers were self-employed. In 2023, the number rose to 16.2 million.
Citing data from the U.S. Small Business Administration, Forces reveals that there are 33.3 million small businesses in the country, which represent 99.9% of the total and employ 45.9% of the country’s workforce. These figures show why SIMPLE IRAs still remain popular options.
Eligibility for a SIMPLE IRA
The IRS has set the eligibility criteria for participating in a SIMPLE IRA, explaining that this retirement plan can be used by businesses with 100 or fewer workers and is available to self-employed individuals and small-business employees who meet the following requirements:
- Received at least $5,000 in compensation from their employer or earned that amount as self-employed workers for two years before the current calendar year (whether or not consecutive)
- You are reasonably expected to earn at least $5,000 during the current calendar year
However, employers can change these requirements as long as they do not set more restrictive ones or impose other conditions to participate in these plans.
In this regard, an employer can eliminate or reduce compensation amounts required in previous or current years but is not allowed to require employees to meet any other conditions to participate in a SIMPLE IRA.
Additionally, employers may exclude some employees from a SIMPLE IRA plan under certain conditions. The following parties could be subject to this:
- Employees covered by union agreements if their retirement benefits were bargained for in good faith by their representatives and the employer
- Non-resident alien employees who did not receive income from a US source
- Employees covered by a collective bargaining agreement between employers and air pilots if represented according to Title II of the Railway Labor Act
Key Features and Characteristics of a SIMPLE IRA
Since a SIMPLE IRA allows you to set aside money in a retirement account if you are a self-employed or small-business worker, these plans can become an important source of income during your golden years.
However, these accounts have other characteristics and features you should evaluate to determine if it’s the option you need to save for the future. These are the most significant:
- A SIMPLE IRA doesn’t have the start-up plans and operating costs of a conventional employer-sponsored retirement plan.
- These plans are available for small businesses, which are those that have 100 or fewer employees, and self-employed individuals.
- It’s so easy to establish a SIMPLE IRA.
- There’s no filing requirement for the employer.
- Employers who have other retirement savings plans cannot establish a SIMPLE IRA.
- Employees can choose whether to make contributions to SIMPLE IRAs.
- An employee always owns or is entirely vested in all the account’s money.
The Mechanism of a SIMPLE IRA
SIMPLE IRAs work like other retirement plans that are sponsored by employers and allow employees to contribute pre-tax dollars to their accounts.
In other words, employees and self-employed individuals can contribute money they haven’t paid taxes on, which reduces their tax burden that year. Also, funds can grow tax-deferred, which means they won’t be subject to taxes until they are withdrawn during retirement.
Process of Establishing a SIMPLE IRA
Setting up a SIMPLE IRA is so easy to do. Employers must choose a financial institution to handle this process. This third party will serve as a trustee, so they’ll hold each participant’s assets.
SIMPLE IRA contributions are made to the accounts that these institutions set up. Employers can decide to let employees choose the trustee or company that will receive the money they will contribute to their retirement plan.
Once the financial institution is chosen, employers must complete the following steps:
- Execute a written agreement on the benefits that will be provided to all eligible employees
- Inform employees about that agreement and provide all the details about the SIMPLE IRA where contributions will be deposited before the employee election period, which usually lasts 60 days and ends on January 1
- Set up the IRA account for each eligible employee or participant using Form 5305-S for a trust account) or Form 5305-SA for a custodial account
To complete the first step in establishing this account, employers or self-employed individuals must adopt a SIMPLE IRA document, which can be done by signing one of the following:
IRS model SIMPLE IRA plan, using Form 5305-SIMPLE (if you have designated a financial institution that will receive the contributions) or Form 5304-SIMPLE (if you allow employees to choose the financial institution to make contributions to)
IRS-approved prototype SIMPLE IRA plan, which is offered by qualified financial institutions, such as banks, savings and loan associations, brokerage firms, and insurance companies
Additionally, employees are required to inform each employee or participant before the election period begins about:
- The opportunity to make a salary reduction choice or change it under the SIMPLE IRA plan
- Their ability to choose their preferred financial institution to serve as trustee of their SIMPLE IRA, if applicable
- Whether employers will make matching contributions or non-elective contributions
- A summary description provided by the financial institution
- Written notice that employees or participants can transfer their balance if they’re using a designated financial institution and that this process will be cost and penalty-free
- Copy of signed forms to satisfy notification requirements (only applies if the SIMPLE IRA is established using 5304-SIMPLE or Form 5305-SIMPLE)
The term “election period” generally refers to the 60 days prior to January 1 of a calendar year, but such dates may be modified when SIMPLE IRAs are set up in mid-year or if this period falls before the first day the employee or potential participant becomes eligible for this plan.
It’s important to understand that there’s a deadline to set up a SIMPLE IRA plan. This is what the IRS says:
The SIMPLE IRA plan can be set up on any date between January and October 1 if the participant or the predecessor employer did not maintain one of these accounts in the past.
New employers emerging after October 1 of the year can establish a SIMPLE IRA as soon as administratively feasible after their business comes into existence.
Employers or self-employed individuals who previously established a SIMPLE IRA must set up a new account effective on January 1. The effective date should be after they actually establish the plan.
Participation and Qualification Criteria
As mentioned, employees and self-employed individuals can participate in a SIMPLE IRA plan if they have earned at least $5,000 in compensation during the two years prior to the current year and are expected to receive the same amount during the current calendar year.
However, employers can make the requirements regarding employee compensation less restrictive and may exclude some participants.
Understanding Contribution Rules and Limits
SIMPLE IRA rules address different aspects, but most focus on contributions. Let’s explore the most important ones!
Employer Contribution Limits
An employer must annually deposit a matching contribution of up to 3% of the employee’s compensation on a dollar-for-dollar basis. However, this amount is not limited by an annual compensation limit.
The 3% limit can be reduced to a lower percentage but cannot be lower than 1%. Also, this reduction cannot be applied for more than two calendar years of the five-year period ending with the calendar year that it’s made.
There’s another option. Employers may make a non-elective contribution for each eligible employee. However, when this formula is used, workers still have to receive an employer contribution even if they don’t contribute to their SIMPLE IRA. This amount must be equal to 2% of the compensation up to the annual limit, which is $330,000 in 2023.
These limits may vary if cost-living adjustments are made in later years.
Although they could not make other contributions to a SIMPLE IRA plan in the past, they’re permitted to deposit additional funds to each participant in a SIMPLE IRA as long as this is done in a uniform manner and the contribution does not exceed the lesser of the 10 % of the employee’s compensation or $5,000.
Employee Contribution Limits
Employee contributions are also limited according to SIMPLE IRA rules set by the IRS as follows:
- In 2024, annual employee salary reduction contributions (elective deferrals) are limited to $16,000. Last year, the limit was $15,500.
- If you are 50 or older, employees can make catch-up contributions of $3,500.
- The IRS explains that each employee’s total contributions are subject to annual adjustments to the cost of living.
This feature allows employers to automatically deduct a fixed amount or percentage from workers’ wages and contribute that amount to a SIMPLE IRA. However, this is only available in cases where the employee chooses to contribute a different amount or no money at all. These contributions can be considered as elective deferrals.
The Definition of Compensation
It’s important to understand what “compensation” means, as this can affect employer contributions. This definition usually appears on the plan document but usually refers to the payment that participants receive from personal services for one year.
If incorrect compensation is used to calculate employer contributions or a participant’s deferrals, this error must be corrected.
Operation, Maintenance, and Annual Review of a SIMPLE IRA
SIMPLE IRA plans may only be maintained on a calendar-year basis instead of on a fiscal-year basis.
Also, participants must send contributions to the financial institution they selected to set up the account. This trustee will be in charge of managing the funds.
However, employees have the freedom to move funds from one SIMPLE IRA plan to another and choose where the funds will be invested. The most common options are stocks and mutual funds.
In simple terms, participants have the decision-making power over their accounts in their hands.
Employer contributions must always be made by the income tax deadline or before the extension deadline if requested.
Also, salary reduction contributions must be deposited into the SIMPLE IRA within 30 days after the end of the month in which the amounts would be paid to the employee or self-employed person in cash.
Employees and employers should receive a statement from the trustee who receives the contributions when they deposit funds the first time and at least once a year after that.
In addition, employers must give each participating employee a statement with information about the amount contributed to their SIMPLE IRA account each year.
Retirement Plans: A Comparative Analysis
As explained above, SIMPLE IRAs are plans that allow you to save for your golden years, but they’re different from other retirement plans. Below is a detailed comparison between them and the most common alternatives.
SIMPLE IRA vs. Traditional IRA: A Comparison
SIMPLE IRAs are similar to traditional IRAs, in that they both offer a tax-advantaged way to save for retirement. However, there are important differences between the two. These are the most significant:
- Anyone with an earned income can set up a traditional IRA, while SIMPLE IRAs are designed to be established by small business owners or self-employed individuals.
- Traditional IRA holders are the only ones who make contributions to their accounts. However, both employees and employers can make contributions to SIMPLE IRAs.
- SIMPLE IRAs may have some restrictions, while the only requirement to set up a traditional IRA is to earn an income.
- The contribution limit for a traditional IRA is $7,000, allowing a catch-up deposit of up to $1,000 for those who are 50 years or older. Meanwhile, contributions to SIMPLE IRAs are limited to $16,000 with a catch-up contribution limit of $3,500.
Evaluating SIMPLE IRA and 401(k)
Employers can choose between a SIMPLE IRA and a 401(k), as both plans allow employees to contribute a percentage of their paychecks to a retirement investment account. In both cases, elective deferrals aren’t subject to income taxes when deposited nor to capital gains as they grow.
However, both options differ in certain details, including the following:
- SIMPLE IRAs are easier to establish and run since 401(k)s are more intricate and require more administrative time.
- 401(k)s are subject to more complicated rules. Contrastingly, SIMPLE IRAs come with fewer responsibilities, eliminating the need to run annual non-discrimination testing or file Form 5500 with the IRS each year.
- SIMPLE IRA plans are usually chaperone than 401(k)s since set-up and administration costs are lower.
- 401(k)s allow employees to defer up to $23,000 this year, while SIMPLE IRAs limit contributions to just $16,000.
- Catch-up contributions, which are available to individuals who are 50 or older, are also different in both plans: $3,500 for SIMPLE IRAs and $7,500 for 401(k)s.
- With 401(k)s, employers can contribute more, allowing them to contribute up to the $69,000 limit with a $7,500 catch-up deposit for a defined contribution retirement plan set by the IRS. They can also make profit-sharing contributions. High-rollers can also combine this with cash balance retirement plans to contribute up to $200,000 in pre-tax retirement savings. However, SIMPLE IRAs do not allow profit-sharing contributions nor can they be combined with other plans for the same purpose, and are limited to 3% of the eligible employee’s compensation.
- 401(k)s can be more customizable than SIMPLE IRAs and offer more control over who can join the plan or be excluded.
- Unlike SIMPLE IRAs, 401(k)s don’t require employer contributions.
SIMPLE IRA vs. Roth IRA: Key Differences
SIMPLE IRAs and Roth IRAs also allow people to save for retirement, but both also differ in the following:
- SIMPLE IRAs have been designed for small businesses and allow employers to save for retirement, while Roth IRAs are retirement accounts where almost any individual can contribute if their income is within specific thresholds.
- Because they offer immediate tax relief, SIMPLE IRAs are suitable for people who expect to be in a lower tax bracket during retirement. In contrast, Roth IRA contributions don’t qualify for a tax deduction, since they are made with after-tax dollars, so they offer tax benefits upon withdrawal.
- Contributions to Roth IRAs are limited to $7,000 (or $8,000 for individuals aged 50 or older) while SIMPLE IRA contributions are limited to $16,000 with an additional $3,500 for those 50 or older.
- Unlike SIMPLE IRAs, contribution withdrawals from Roth IRAs are penalty-free if made after reaching age 59.5 and tax-free at any time. Earning withdrawals are also tax-free if the owner is 59.5 years or older and has had the account for at least five years.
- If you contribute to a SIMPLE IRA, you can invest funds in mutual funds, stocks, and ETFs, but this depends on the financial institution that manages the account. Roth IRAs offer the same investment choices, but holders typically have access to a wider variety of options.
SIMPLE IRA and SEP IRA: A Comparative Study
Although both programs are set up by employers to assist employees with their retirement savings and have similar rules, there are important differences between SEP IRAs and SIMPLE IRAs, including the following:
- SEP IRAs only allow employers to make contributions. However, employees can contribute money to a SIMPLE IRA through elective deferrals from their paychecks.
- Employers are required to contribute to their employees’ SIMPLE IRAs, but this does not happen with a SEP IRA, as they aren’t required.
- Employer contributions to SEP IRAs are limited to the lesser of 25% of the employee’s total compensation or $69,000. Self-employed individuals can make contributions of up to 20% of their net income. However, SIMPLE IRAs allow employees to contribute up to $16,000 (or more if they’re 50 years old) and employers to make additional contributions.
Advantages of a SIMPLE IRA
SIMPLE IRAs offer benefits to both employers and employees. Below are the most important ones:
Employer Benefits of a SIMPLE IRA
The biggest benefit that SIMPLE IRAs offer employers has to do with start-up and operating costs, as they’re lower compared to other retirement plans. Plus, they can get a tax deduction for the money they contribute to their employee’s accounts.
Employee Advantages of a SIMPLE IRA
Employees can also enjoy several benefits by participating in a SIMPLE IRA plan, including the following:
- If the employer chooses the non-elective 2% method for making contributions, employees don’t need to sign up for salary deferrals in order to get the contribution from the company they work for. Also, if they make contributions under the reduction/matching formula, they can earn the matching contribution.
- There’s no vesting period since contributions made by employers vest immediately. Employees own 100% of the money deposited in the SIMPLE IRA.
- The eligibility criteria for participating in a SIMPLE IRA aren’t strict. Plus, the IRS allows employers to make these requirements less restrictive.
- Individuals can contribute to a SIMPLE IRA and other retirement plans at the same time.
- SIMPLE IRAs offer more investment options than other retirement plans, such as the 401(k).
Financial Advisor Perspective on SIMPLE IRA Benefits
A SIMPLE IRA can be a good option for small businesses that want to help employees save for retirement, for such workers, and for self-employed individuals. They’re easy to run and cheaper than other options. Plus, the eligibility criteria are less strict, allowing more people to participate.
Furthermore, the IRS allows individuals to contribute to SIMPLE IRAs and other retirement plans, such as Roth or Traditional IRAs at the same time. However, it’s important to consider how they may affect the tax benefits offered by other accounts.
Contributions to a SIMPLE IRA can preclude an individual who is contributing to a traditional IRA from getting a tax deduction for those deposits since they will be considered “covered by an employer plan” according to IRS rules.
Limitations and Challenges of SIMPLE IRA Plans
Although they offer several benefits, SIMPLE IRAs also come with drawbacks. Let’s go over the most important ones:
Understanding Contribution Limits
Contribution limits are low compared to other workplace retirement plans, such as 401(k)s and SEP IRAs. Accounts that allow higher contributions enable individuals to save more for their golden years and can even lower their total taxable income since most are made with pre-taxed dollars.
Withdrawal Rules and Associated Penalties
While you can withdraw contributions and earnings from a SIMPLE IRA at any time, this action is subject to certain limitations. Also, non-qualified distributions may be subject to hefty penalties.
The rules for withdrawing from your IRA suggest that withdrawals are taxable the year they are received. Additionally, they may be subject to a 10% additional tax penalty if done before the participant turns 59.5. This penalty can increase to 25% of the withdrawal amount if this occurs within the first two years of participation.
However, withdrawals from SIMPLE IRAs are penalty-free once participants reach age 59.5 and can even continue participating in the employer’s retirement plan.
In addition, contributions made to a SIMPLE IRA and earnings must be withdrawn as distributions according to the following rules:
- Participants must begin taking required minimum distributions (RMDs) as soon as they turn 72 (or 73 if they turn 72 after December 31).
- Required minimum distributions are calculated based on the account balance at the end of the previous calendar year and a distribution period found in the IRS’s “Uniform Lifetime Table.”
- Participants must begin taking these distributions from their SIMPLE IRAs on April 1 of the year following the calendar year in which they reached the required age.
- Retirement plan documents may require SIMPLE IRA participants to begin taking RMDs even if they’re still employed.
- After the required beginning date, participants must take RMDs each year by December 31.
- Participants who fail to take RMDs or withdraw amounts that aren’t large enough may be subject to a 50% excise tax on the amount that was not distributed.
Employer Responsibilities and Obligations
Employers must meet certain responsibilities and obligations if they establish a SIMPLE IRA, including the following:
- All workers employed at any time during the calendar year the SIMPLE IRA is established must be taken into account.
- Employers must provide each eligible employee with full details about the SIMPLE IRA plan where contributions will be deposited prior to the election period.
- A SIMPLE IRA must be established for each employee before the first date by which employers must make a distribution, even if they’re unable or unwilling to do so. In these cases, business owners can select the financial institution.
- Employers must respect the requirements regarding notices that must be delivered to employees and related deadlines.
- All employees must receive prior notice about upcoming election opportunities.
- Matching and non-elective contributions to the trustee who maintains the SIMPLE IRA must be made by the due date to fill out the business’s income tax returns, including extensions.
Investment Options and Limitations in a SIMPLE IRA
As mentioned, contributions made to SIMPLE IRA plans can be invested in stocks, mutual funds, or similar investment products. However, the number and type of options available may vary depending on the institution that manages the account.
Tax Implications of a SIMPLE IRA
SIMPLE IRAs offer tax benefits but also come with tax implications and obligations. Below is more information on this topic.
Exploring Tax Deferral Benefits
Employers and employees can contribute a portion of their pay to a SIMPLE IRA. However, since this is a tad-advantaged plan, funds can grow tax-deferred until withdrawals.
In other words, participants won’t have to pay taxes on their investment growth. Instead, they’ll be required to do so when taking distributions from their accounts.
Tax Consequences of Withdrawals
Contributions and earnings withdrawn from SIMPLE IRAs will be taxed as ordinary income. Additionally, participants may be penalized an additional 10% or 25% tax if they make early withdrawals unless they qualify for certain exceptions, which may include distributions used for the following:
- Unreimbursed medical expenses if they exceed 10% of the adjusted gross income or 7.5% if the participant’s spouse is 65 years old or older
- Costs of medical insurance while unemployed
- Amounts to build first house
- Qualified higher education expenses
- Qualified reservist distributions
- Withdrawals made by a beneficiary of a deceased SIMPLE IRA owner
- Withdrawals resulting from an IRS levy
Tax Deduction Benefits of SIMPLE IRA
Employers may be able to deduct all contributions made to their employee’s SIMPLE IRAs on their tax return.
Contributions to SIMPLE IRAs aren’t subject to federal income tax withholding, whether they are matching or non-elective. However, salary reduction contributions are subject to the following taxes:
- Social security taxes
- Medicare taxes
- Federal unemployment (FUTA) taxes
Terminating a SIMPLE IRA Plan
After the SIMPLE IRA is established, this plan must be maintained for a whole calendar year, making all required contributions in the employee notice.
However, employers can terminate a SIMPLE IRA plan if it no longer suits their business. Ideally, they should consult with their financial institution to determine if there is a better option.
Steps to Terminate a SIMPLE IRA Plan
These are the steps employers must complete to terminate a SIMPLE IRA plan:
- Notify employees that they will not continue sponsoring the SIMPLE IRA, effective the following January 1, within a reasonable time before November 2
- Notify the financial institution that manages the SIMPLE IRA and the payroll provider that contributions will no longer be made for the next calendar date, expressing the desire to terminate contributions
Implications and Consequences of Terminating a SIMPLE IRA
Although employers are advised to keep records of their actions, they are not required to notify the IRS that they have terminated a SIMPLE IRA plan.
As long as they follow the steps described above, employers can terminate SIMPLE IRA plans after the first year without consequences.
Navigating SIMPLE IRA: From IRS Perspective
The IRS describes SIMPLE IRAs as great-advantaged ways to save for retirement, as these accounts allow employers and employees to set aside money that can serve as a source of income for participants during their golden years.
IRS Guidelines for SIMPLE IRAs
According to the IRS, SIMPLE IRAs are available for small businesses with 100 or fewer employees that do not have another retirement plan in place. Employers are required to make contributions each year, but employees can choose to do so.
However, the IRS states that employees are 100% vested in all money deposited in these accounts.
Simple IRAs also come with contribution limits, which are slightly higher than other IRAs but lower than other retirement plans. Employers have two methods to deposit money (matching contributions or non-elective contributions).
Furthermore, the IRS has set rules on withdrawals, which are similar to those for traditional IRAs, determining that participants can face penalties if they fail to take RMDs or do so before it is allowed.
IRS Role in Regulating SIMPLE IRA
The IRS establishes rules that employees who establish SIMPLE IRAs and employees who benefit from these plans must follow, including contribution limits, eligibility criteria, withdrawal penalties, required minimum distributions, related dates, and more.
Frequently Asked Questions
What are the contribution limits for a SIMPLE IRA?
In 2024, employees are allowed to contribute up to $16,000 to a SIMPLE IRA. However, people can make an additional $3,500 catch-up contribution if they have already reached age 50.
Employers are required to make mandatory contributions but can choose between two options. If they provide matching contributions of up to 3% of employees’ pay, there are no annual compensation limits.
The second option is to make non-elective contributions, which can equal 2% of the employee’s compensation. However, this is limited to a maximum salary of $345,000 this year.
In 2024, employers can also make additional contributions to each employee, but they’re also limited to 10% of compensation or $5,000, whichever is less.
How does a SIMPLE IRA differ from a traditional IRA or a 401(k)?
SIMPLE IRAs are different from traditional IRAs and 401(k)s in different ways, but the main ones are related to contribution limits, eligibility criteria, and management options.
While traditional IRAs are available to anyone earning an income, SIMPLE IRAs were designed for small-business employees and self-employed individuals. The latter can only be opened by employers, but have higher contribution limits.
Although 401(ks) allow employees to save for retirement with employee contributions, they aren’t the same as SIMPLE IRAs. These have higher limits and are more flexible. In contrast, SIMPLE plans are easier to run and cheaper.
What are the tax benefits of a SIMPLE IRA?
SIMPLE IRAs allow investments to grow tax-deferred. Additionally, employers can claim tax deductions on their tax return for contributions made to these accounts.
What are the penalties for early withdrawal from a SIMPLE IRA?
Participants may face penalties of 10% or 25% of the amount withdrawn if distributions are taken before reaching age 59.5, as set by the IRS.
Can I terminate or amend my SIMPLE IRA plan in the middle of the year?
No, you can’t terminate or amend a SIMPLE IRA in the middle of the year, since all contributions promised in the employee notice must be funded during the entire calendar year.
SIMPLE IRAs were designed for small businesses that want to commit to helping their employees save for retirement and self-employed individuals who share the same goals. Additionally, these accounts are cheaper and easier to manage than similar plans.
However, SIMPLE IRAs come with limitations, obligations, and tax implications. It’s important to evaluate all of these aspects to determine if it’s really the right option for your business or if it is what you need to save for your golden years and plan your financial future if you are self-employed!