It’s That SIMPLE: Setting Up Simple IRAs for Small Businesses

The SIMPLE IRA can be an inexpensive retirement savings tool that employers may choose for their workers and themselves as well.

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Key Takeaways

  • SIMPLE IRAs are available to businesses with 100 or fewer employees
  • The SIMPLE IRA contribution limit is $12,500 for 2018; it goes up to $13,000 for the 2019 tax year
  • Rules and tax benefits for SIMPLE IRAs are similar to those of traditional IRAs 

If you’re among the 28 million small business owners in the U.S., or one of the 15 million self-employed workers in the U.S., you might want to consider establishing a Savings Incentive Match Plan for Employees, better known by its acronym: a 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?—more simple than 401(k) plans but allow employees to contribute for themselves unlike most other small business retirement plan options.

Here’s what you need to know about the SIMPLE IRA rules, such as potential tax benefits, withdrawal requirements, and SIMPLE IRA contribution limits.

What Is a SIMPLE IRA?

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. 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, it's given to each employee at least 60 days before January 1 of the 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 contribute for 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 participation for store clerks who may have made only $3,000 the prior year. 

What Are the Rules and Contribution Limits?

The SIMPLE IRA contribution limit for the 2018 tax year is $12,500, meaning employee salary deferral contributions may not exceed $12,500 per person. For 2019, the contribution limit rises to $13,000. For both the 2018 and 2019 tax years, employees age 50 and older may make additional “catch-up” contributions of as much as $3,000. 

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, he or she must make a 2% contribution to every eligible employee, even to a worker who doesn’t take any salary withdrawal 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, the 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 1/2 you may have an additional 10% penalty. If you have not held the SIMPLE account for at least 2 years the 10% penalty is increased to 25% of the amount your took out. Remember: There are other exceptions to the 10 penalty and these exceptions also apply to the 25% penalty.

When you reach age 70 1/2, you must begin taking a certain amount each month, in what’s called 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 50% excise tax on that amount.

An RMD worksheet can help determine your actual distribution requirement.

Are There Tax Benefits?

The employer’s contributions to all accounts is 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 an 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) plansSEP 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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TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

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