Whether you are a small business owner or a self-employed individual, planning for retirement can be a difficult task. There are many avenues available but selecting the one that suits your situation best can take some research.
Depending on your situation and your needs, a savings incentive match plan may be the best option available. SIMPLE IRAs are retirement plans made easy and accessible for small business owners. If you are looking for a decent retirement plan, here’s what SIMPLE IRAs have to offer.
What is a SIMPLE IRA?
Savings incentive match plan for employees, or SIMPLE IRAs, are retirement plans that can be established by small business owners, or self-employed individuals. This retirement option allows any eligible employees to contribute part of their pre-taxed pay to their retirement. Any employee can contribute their entire contributions from their current income. Employers, in turn, are given a tax deduction for all plan contributions.
Any employees who contribute to the plan are immediately vested. This means any money put into the SIMPLE IRA belongs to them. If any employee left the company, all retirement contributions can go with them.
Of course, there is certain eligibility that must be met and rules for employers to follow; however, SIMPLE IRA retirement plans are easy to set up and retain.
Who is Eligible?
Any small business with no more than 100 employees, including self-employed individuals who receive income from an employer, are potentially eligible. These employees must have earned at least $5000 in compensation in the previous years and should be expected to earn at least $5000 in the current year. Additionally, the business cannot have any alternative “employee-sponsored” plans. If your small business fits these requirements, then you can easily open a SIMPLE IRA for your company.
When it comes to making contributions, employees can elect to contribute 100% up to a maximum of $13,000. With contributors age 50 or older, the contribution amount increases to $16,000 for make-up contributions. Employers can elect to either match the employee’s salary reduction contributions up to 3%.
They also have the option to pay a 2% non-elective contribution for each eligible employee regardless of their contribution to their SIMPLE IRA. Any contributions should be made within 30 days following the month the amount should be paid to the employee. Any match or non-match contributions must be made by the federal tax return due date.
Another incentive comes in tax advantages. Employer contributions are tax-deductible for employers. Employee contributions, on the other hand, are pre-tax salary reduction contributions. This reduces the current federal income tax. Finally, SIMPLE IRA contributions grow tax-deferred.
There are many benefits to opening a SIMPLE IRA, but before jumping in, it’s essential to examine the pros and cons. With all the important details, you can decide if opening a SIMPLE IRA is the best choice for your small business.
The Pros of SIMPLE IRAs
SIMPLE IRAs are simple plans to administer and easy establish. The rules are clear cut, so you don’t have to worry about confusing qualifications. These retirements are also inexpensive when compared to other plans, like 401(k)s. They have higher contribution limits than traditional or Roth IRAs. Additionally, with SIMPLE IRAS, there are no compliances.
Employers aren’t required to file annual reports with the IRS. In fact, the retirement plan responsibility falls on both parties. Contributions are a shared experience and both employee and employer need to put in for the account to grow. Plus, with all the tax advantages, this retirement plan may be a great fit for your business.
Cons of SIMPLE IRAS
While there are many positive aspects to SIMPLE IRAs, there are some downsides to the plan. For employers, the contributions are mandatory. Also, there is no Roth IRA option. Employees risk a 25% penalty on distributions made before 59 ½ and within the first two years of participation.
Also, loans are not allowed for any reason. Any withdrawal before retirement results in a 10% penalty. Additionally, employers are tied to this one retirement plan. Employers cannot maintain any other plans.
While there aren’t many cons, some may be crucial when it comes to selecting the best fit for your business. Whether you want an easy plan with tax benefits or more flexibility, it’s always a good idea to examine any plans open to you before making a final decision.
Is a Simple IRA right for you?
Running a small business is difficult enough without having to worry about your nest egg. If you are looking for a retirement plan that is easy to set up and manageable, a SIMPLE IRA may be the solution you need. Give thought to the requirements, your company’s eligibility, and what you want to get out of your plan.
As always, before making any retirement plan decisions, consider speaking with a financial advisor. You don’t have to grapple with planning for your future alone. Take the steps and start saving today.