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Table of Contents
If you run a small business, you may want to provide retirement benefits for your employees. One option is the SIMPLE IRA.
What is a SIMPLE IRA? It's a type of individual retirement account (IRA) specifically designed for small businesses. SIMPLE stands for "savings incentive match plan for employees." Available to businesses with 100 or fewer employers, it's relatively easy to set up.
How does a SIMPLE IRA work? We'll walk through the basics to help you consider whether a SIMPLE IRA is a good option for your business.
MORE What Are the Different Types of IRA Accounts?
- A SIMPLE IRA is a type of individual retirement account specifically designed for small businesses. SIMPLE stands for "savings incentive match plan for employees."
- This type of retirement account is available to businesses with 100 or fewer employers, and it's relatively easy to set up.
- With a SIMPLE IRA, employees are able to make contributions through payroll deductions and employers make matching contributions.
- Employers must match employee contributions up to 3% or contribute 2% for employees who don't contribute to their own accounts.
How to Know If You're Eligible for a SIMPLE IRA
Not every business can offer a SIMPLE IRA to its employees. In order to be eligible for a plan, your company must meet some requirements:1
- You must employ no more than 100 persons.
- Participating employees must have earned at least $5,000 in any two years before the current calendar year and expect to earn $5,000 in the current calendar year.
- Your business cannot offer any other retirement plans.
If you run a larger company and don't qualify, consider other types of employer-sponsored retirement plans.
With a SIMPLE IRA, employees are able to make contributions through payroll deductions and employers make matching contributions. Employers must match employee contributions up to 3% or contribute 2% for employees who don't contribute to their own accounts.2
How to Set Up a SIMPLE IRA Plan
As the name suggests, establishing a plan for your business is fairly easy. So how does a SIMPLE IRA work?
First, as the employer, you must decide if you'll contribute to employees' plans at the financial institution of your choice or if employees may choose their own.
If you plan to work with a bank that you designate, fill out Form 5305-SIMPLE; if you decide to let employees choose their own bank or financial institution, fill out Form 5304-SIMPLE.
For detailed guidance on setting up and maintaining a SIMPLE IRA plan and complying with all the rules and requirements of the plan, work with a trusted financial professional.
Benefits of a SIMPLE IRA
One benefit of a SIMPLE IRA is truly its simplicity: It's a straightforward way to offer a retirement savings plan for your employees, provided your company meets the eligibility requirements. The plan also requires relatively little maintenance.
Other benefits employers may enjoy include low administrative costs, no annual reports and potential tax advantages.3 Employees likewise also benefit. The plan may help them reach their savings goals and make tax-deferred contributions toward their retirement.
Other SIMPLE IRA Considerations
Although the SIMPLE IRA offers some advantages, it also has potential drawbacks. For instance, the contribution limit for SIMPLE IRA plans is lower than the limits for other retirement plans, topping out at $15,500 for 2023.4 A simplified employee pension (SEP) IRA, by comparison, allows employers to contribute 25% of an employee's total compensation, up to $66,000 in 2023.5
It's also important to note that a SIMPLE IRA account cannot be a Roth account. Employees should work with a financial professional to determine whether contributions to their SIMPLE IRAs will affect their eligibility to deduct contributions to an individual IRA account. 6
MORE Employee Benefits for Your Business: SEP or SIMPLE IRAs?
The Bottom Line
For many small businesses, a SIMPLE IRA provides a valuable benefit to employees. With an understanding of what a SIMPLE IRA is and how they work, you can research your options and compare the benefits and drawbacks of different products before deciding which retirement plan better suits your business. Contacting a knowledgeable financial professional and tapping their expertise can help you choose among the available options and move forward with confidence.
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- SIMPLE IRA plan. Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan. Last updated January 3, 2022. Accessed May 4, 2022.
- SIMPLE IRA plan FAQs. Internal Revenue Service. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans#employer. Last updated January 3, 2022. Accessed May 4, 2022.
- Simple IRA plans for small businesses. U.S. Department of Labor's Employee Benefits Security Administration (EBSA). https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/simple-ira-plans-for-small-businesses.pdf. Published November 2020. Accessed May 6, 2022.
- Retirement topics — SIMPLE IRA contribution limits. Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits. Last updated October 26, 2022. Accessed January 5, 2023.
- SEP contribution limits (including grandfathered SARSEPs). Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps. Last updated October 26, 2022. Accessed January 5, 2023.
- SIMPLE IRA plan fix-it guide — SIMPLE IRA plan overview. Internal Revenue Service. https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-simple-ira-plan-overview. Last updated November 9, 2021. Accessed May 6, 2022.