What is a SIMPLE IRA?

The SIMPLE IRA is an employer sponsored retirement plan available to small businesses with less than 100 employees including sole proprietorships, partnerships, S corporations and C corporations.

SIMPLE IRA's consist of 2 parts: an optional employee salary deferral and a mandatory employer match. SIMPLE IRA's are easy to administer and IRS filings are not required. SIMPLE IRAs must be established by October 1st in order to contribute to a plan for the current year.

Employee Contributions

With a SIMPLE IRA, eligible employees can elect to contribute by salary deferral (like a 401k plan). In 2021 employees can elect to defer up to 100% of their income up to a maximum of $13,500 or $16,500 for those age 50 or older. SIMPLE IRA participants age 50 or older are permitted to make an additional $3,000 catch-up contribution. In general, contributions made by an employee are 100% tax deductible and investment earnings grow tax deferred and can be withdrawn after age 59 ½. Withdrawals prior to age 59 ½ are likely to incur taxes as well as IRS penalties for premature withdrawal.

Employer Contributions

Employers must make mandatory contributions into a SIMPLE IRA on behalf of their eligible employees and into their own SIMPLE IRA account. In general, employer SIMPLE IRA contributions made into these accounts are 100% tax deductible. Contributions must be made annually by the employer's tax filing deadline (including extensions).

Employer contributions can be made in one of the following ways:

  1. A 3% employer match is made only for those employees electing to defer a portion of their salary. Employers match employee salary deferrals dollar for dollar up to 3% of employee compensation. An employer can reduce the employer's match to 1% of each participating employee's compensation for any two years in a five year period.
  2. A 2% employer contribution based on an employee’s compensation (up to $5,800 in 2021) for all eligible employees regardless of whether the employee is electing to defer a portion of their salary or not.

SIMPLE IRAs are very inexpensive to maintain and their costs vary, but may cost approximately $15 to $25 annually per employee account.

Note on the SIMPLE IRA:

Employers who would like to sponsor a retirement plan, but who do not want to make contributions to employees’ accounts may want to consider a 401k. A business owner with employees must weigh the SIMPLE IRA’s benefits of low administrative fees, but the requirement of the employer match versus a 401k which has much higher administrative fees, but does not require an employer match. Contact us if you need clarification.

Are you self employed and have no W-2 employees?

If you are then you should consider an Individual 401k as an alternative to a SIMPLE IRA. Self employed individuals who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits. Compare the contribution limits for an Individual 401k versus a SIMPLE IRA.

SIMPLE IRA Calculator

Use the calculator to see how much can be contributed to a SIMPLE IRA based on your income. Use the SIMPLE IRA Calculator.

Need Help or Advice?

Eric Kuniholm Eric Kuniholm, CPWA®
Certified Private Wealth Advisor®
Beacon Capital Management Advisors

If you have questions and need advice contact us. Beacon Capital Management Advisors is registered in all 50 States and is an Accredited Business of the Better Business Bureau since 2004. FINRA’s BrokerCheck.

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