SIMPLE IRAs are a retirement savings option that employers may pick for their workers and themselves. Explore the rules and contribution limits of SIMPLE IRAs.
The SIMPLE IRA contribution limit is $15,500 for the 2023 tax year; it goes up to $16,000 for the 2024 tax year
If you’re among the 28 million small business owners in the United States, or one of the 15 million self-employed workers in the United States, you might want to consider establishing a Savings Incentive Match Plan for Employees, better known by its acronym: SIMPLE IRA.
The SIMPLE IRA can be among the easiest ways for self-employed people and businesses with fewer than 100 employees to set aside tax-deferred money for retirement.
If you meet the eligibility requirements, setting up a SIMPLE can allow you to sidestep much of the heavy lifting required for other sponsored retirement plans, such as a 401(k), which typically require hefty reporting and administrative duties. SIMPLE IRAs—dare we say it?—are more simple than 401(k) plans, but they allow employees to contribute for themselves unlike most other small business retirement plans.
Here’s what you need to know about the SIMPLE IRA rules, such as potential tax benefits, withdrawal requirements, and contribution limits.
A SIMPLE IRA is a retirement savings plan available to any small business or self-employed worker with 100 or fewer employees in a calendar year. A SIMPLE is established by the business owner filling out a plan document to set the terms of the plan. Vendors for SIMPLEs may use different types of plans, so check with your provider for the correct form. The setup period for new SIMPLE IRAs runs from January 1 to October 1 of the current year, unless you start the business after October 1. If you start a new business after October 1, you may open your new SIMPLE IRA plan when you started your business. For example, if you start a new business on November 1, 2023, you could also start your new SIMPLE IRA effective November 1, 2023, even though it’s after the normal October 1 deadline. Those already maintaining a SIMPLE IRA need to re-up on January 1 of each calendar year.
There are no IRS filing requirements for the employer, but it’s important to note that the employer cannot have any other retirement plan in place. According to the IRS, any employee earning at least $5,000 during any two years before the current calendar year, and who expects to make at least that in the current calendar year, can participate. Employees must be notified of the plan before the beginning of the election period, or in recurring SIMPLE IRAs, 60 days before January 1 to allow enough time for them to make any salary deferral contribution changes.
Typically, the SIMPLE provider will create a sample Summary Description to send to the business owner. Once the owner completes the Summary Description, the business owner gives a copy to each employee at least 60 days before January 1 of the coming year. Thus, before employee salary deferrals start in January, each eligible employee has had at least 60 days to consider how much to contribute. At the same time, the business owner must also tell the employees whether the employer will match employee contributions or if they’ll contribute to all eligible employees.
Here’s a potential plus for some employers: They can be less restrictive in their participation rules but cannot add higher limits or any other rules. For example, Joe’s Grocery can allow store clerks who may have made only $3,000 the prior year to participate. But Joe can’t provide a larger match for employee contributions than the standard dollar-for-dollar match (up to 3% of the employee’s salary), nor can he provide that matching contribution PLUS additional across-the-board contributions for employees. Contributions for employers to employees are capped.
The SIMPLE IRA contribution limit for the 2023 tax year is $15,500, meaning employee salary deferral contributions may not exceed that amount per person. For 2024, the contribution limit rises to $16,000. For 2024, employees 50 and older may make additional “catch-up” contributions up to $3,000. Starting in 2024, the SECURE 2.0 Act added a provision where some plans may allow an even higher employee salary deferral contribution. This higher limit must be offered to employees if the employer has fewer than 26 employees who earned $5,000 in 2023 (Note: This may be a different list then the employees who are actually eligible for the plan.).
If the employer employs 26 or more employees earning $5,000 or more in 2023, the employer may choose to allow employees to contribute the higher salary deferral limit for 2024.
So, what is the higher salary deferral limit? For 2024, it’s 110% of the normal $16,000 limit, which equals $17,600.
The employer may either match the employee contribution on a dollar-for-dollar basis (up to 3% of the employee’s salary) or make what’s called a non-elective contribution. If an employer chooses the non-elective contribution instead of matching, they must make a 2% contribution to every eligible employee, even to a worker who doesn’t take any salary deferral contribution at all.
The employer must choose one of these contribution types for each year. There is some ability to reduce the employer contribution in some years, but this is limited, so do some homework first before deciding on employer contributions.
Regarding withdrawals, SIMPLE IRA rules are similar to those of traditional IRAs. When you withdraw from a SIMPLE IRA, you’ll pay taxes on any amount not rolled over. And if you’re under 59 ½, you may have an additional 10% penalty. If you have not held the SIMPLE account for at least two years, the 10% penalty is increased to 25% of the amount you took out. Remember: There are other exceptions to the 10% penalty, and these exceptions also apply to the 25% penalty.
When you reach age 73, you must begin taking a certain amount each year, aka a required minimum distribution (RMD). Remember, your contributions are tax-deferred, not tax-free. One more word of caution regarding RMDs: If you don’t take one, you could face a 25% excise tax on that amount.
An RMD calculator can help you determine your actual distribution requirement.
The employer’s contributions to all accounts are tax deductible, while the worker’s contributions are federally pre-tax. That allows for tax-deferred growth potential on contributions. Thus, investment gains are not taxed until withdrawal.
Remember: Like other retirement savings plans, there are penalties for early withdrawal. Not only are the dollars pulled out subject to income tax, but that amount is also coupled with an extra 10% tax if the employee is younger than 59 1/2. If the distribution was made in the first two years of participation in the plan, that penalty escalates to 25%. Like traditional IRAs, there are some exemptions for early withdrawal. Refer to this list on the IRS website.
As a small business owner, you have a lot of choices when it comes to retirement plans. In addition to the SIMPLE IRA, there are solo 401(k) plans, SEP-IRAs, and profit-sharing plans. Each retirement plan has its pros and cons. TD Ameritrade can help you better understand the different types of retirement plans to see which may be right for you and your business.
Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your IRA.
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