Small Business Retirement Plans > SIMPLE IRA

A SIMPLE IRA Plan must be set up by October 1st to be considered established for the current tax year!

What is a SIMPLE IRA?

A Savings Incentive Match PLan for Employees (SIMPLE IRA), which is different from a SEP IRA, provides employers with an easy way to set up a retirement plan (for both the employer and its employees) that allows both the employer and its employees to contribute to traditional IRAs that are set up for employees. Simple IRAs are ideally suited as a start-up retirement savings plan for small employers that are not currently sponsoring a retirement plan.  Learn about eligibility, contribution limits, distributions and more below.

How much can an employer contribute to an employee's SEP-IRA? How much can an employee contribute to SEP IRA?

Why choose a Savings Incentive Match Plan for your employees? (SIMPLE IRA)

• SIMPLE plans were designed to encourage more small companies to establish retirement plans.
• SIMPLE IRAs are less complicated to set-up and administer than traditional 401(k)s and allow for salary deferral contributions to IRA accounts.
• Salary deferral contributions made by employees and employer contributions made to the participant's SIMPLE IRA are deductible by the employer.
• Complicated non-discrimination testing and 5500 reporting is not required.
• Earnings accumulate in the account tax-deferred.
• Employees consider salary deferral plans a valuable benefit.
• Employer has no fiduciary responsibility. Contributions are invested in an individual's IRA, and the individual makes all investment decisions.
• You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting a SIMPLE IRA plan. (IRS Form 8881, Credit for Small Employer Pension Plan
  Startup Costs). 
• For more information visit www.irs.gov.

Employee Eligibility

SIMPLE IRA plans are limited to employers with less than 100 or fewer employees during the preceding year who received at least $5,000 in compensation from the employer.

Can defer up to 100% of compensation for the year (reduced by your other elective deferrals for the year) not to exceed $13,500 (2020 & 2021). 

Please note:

SIMPLE IRA Contributions (Salary Reduction Contributions)

• When an employee elects to make salary deferral contributions to a SIMPLE IRA account, there is no limit on the percentage of the salary deferral; and the employee may elect to defer up to 100% of his compensation, provided the total contribution amount does not exceed the annual deferral limit.
• The elective deferral limits for SIMPLE IRAs are presented below along with additional "catch up" salary deferral contributions may be made to SIMPLE IRA accounts for participants who have attained the age of 50 by year-end.

Simple IRA Contributions/Participant deferrals

• All participant contributions are immediately vested.
• The participant controls the distributions.

(Elective deferrals to a SIMPLE IRA are excluded from the gross income of the participant)

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How Much Salary Can You Defer if You’re Eligible for More than One Retirement Plan?

 
Did you contribute to another retirement plan this year?

While the amount that you (as an employee) can contribute from your salary to a SIMPLE IRA cannot exceed $13,500 in 2020 and 2021, this amount may be impacted by any contributions made to another retirement plan made in the same year.

If you participate in any other employer plan during the year and you have elective salary reductions (you make contributions from your salary) under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $19,500 in 2020 and 2021.

Catch-up contributions: If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $3,000 in 2020 and 2021.

Employer Contributions

An employer who sponsors a SIMPLE plan must make some type of contribution for his employees; however, he has the option of making either matching contributions or non-elective contributions for any tax year.

How much do I have to contribute to my employees who are participating in our SIMPLE IRA plan?

You're generally required to either:

• match each employee's salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee's compensation (not limited by the annual compensation limit), or
• make nonelective contributions of 2% of the employee's compensation up to the annual limit of $290,000 for 2021 ($285,000 for 2020), subject to cost-of-living adjustments in later years. If you choose to make nonelective contributions, you must make them for all eligible employees whether or not they make salary reduction contributions.

Employer Contributions Options for 2020 & 2021

Option 1: If the employer chooses matching contributions, he is generally required to match the employee's elective deferral contribution dollar for dollar up to 3% of the employee's compensation.

Option 2: If the employer chooses non-elective contributions, he is required to contribute an amount equal to 2% of each eligible employee's compensation for each employee who is eligible to participate and has earned at least $5,000 in compensation for the year.

SIMPLE Rollovers and Transfers

Rollovers and transfers must only be made between SIMPLE accounts, not between SIMPLE and other IRA accounts. After the two-year holding period has elapsed, the participants may rollover assets from the SIMPLE account to an IRA, or convert the assets to a Roth IRA.

Simple Distributions

Distributions from a SIMPLE IRA are taxed as ordinary income when distributed. Distributions from a SIMPLE IRA follow all the rules for distributions from a traditional IRA, with two exceptions:

• Distributions are required to begin by April 1 of the year following the year the participant reaches age 72.
• After the initial distribution year, the participant must take a required minimum distribution for each year by December 31 of that year.
• If you reached age 70½ before 2020 you may have a required minimum distribution for 2021 even though you’re not 72 yet. (See IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).)
• Simple Pre-2 Year Distributions: The IRS imposes a 25% penalty on distributions taken from a SIMPLE IRA within two years of the date of the first contribution to the Simple account.
• Required Beginning Date May Be Delayed if a person is still working and has compensation once they have attained the age of 72, required minimum distributions may be delayed until the year following the year the participant retires.

Call us today at 1-800-50-PLACE (1-800-507-5223, 919-719-7200) to get started! 

IRS Circular 230 Notice: These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor.

(Please be sure to check with your tax and/or legal advisor prior to making any contributions, withdrawals or other changes to your retirement account.  Place Trade Financial, Inc. does not offer tax or legal advice. Information provided by Place Trade is for educational purposes and should not be considered as tax or legal advice under any circumstances.)