Simple IRA – Explained
Saving up for retirement can be a struggle, especially if you own a business. Whether you are self-employed or have a few employees, small businesses don’t have the luxury of the pension plans or 401K that come from a bigger company. The good news is there are options available to help these smaller companies build retirement savings.
Simple IRAs are low-cost and easy-to-set up plans that can help small business owners and their employees save for their golden years. If you are self-employed or own a business and want to start saving, here are 10 reasons you need a Simple IRA.
But First – What is a Simple IRA?
Simple (savings incentive match plan for employees) IRAs allow employees and employers to contribute to a traditional IRA. This plan is suited as a startup retirement savings plan for small employers not sponsoring a retirement plan. Simple IRAs are low-cost compared to other retirement plans, and the idea is centered on shared responsibility between the employer and the employee.
Both have a responsibility to contribute toward a retirement fund. So, why do it?
1. Easy to Administer
On the employer side, Simple IRAs are very easy to set up. They require very little paperwork. While an employer can’t have any additional retirement plans, no filing is required of them. Owners must fill out a Form 5304-SIMPLE or 5305-SIMPLE for a Simple IRA prototype or an individually designed plan. Once these steps are taken, it’s time to start saving.
2. Employee Contributions are 100% Vested
An excellent employee benefit that comes from Simple IRAs is that all employee contributions are 100% vested. They don’t have to wait for any specific amount of time for the company contributed funds. Vesting happens immediately, and the employees own all the Simple IRA money.
3. Employers Must Contribute Every Year
Another employee benefit is that employers much match contributions every year. Employers must match a contribution up to 3% of compensation – not limited by the annual compensation limit or they put in 2% nonelective contributions for each eligible employee. Even if an eligible employee doesn’t contribute to the Simple IRA, that employee must still receive an employer contribution equal to 2% of his or her compensation up to the annual limit of $280,000.
4. Employees can Contribute.
Employers don’t have to shoulder the burden of paying for their employee’s retirement. Employees can contribute to their own retirement funds as well. Both sides share responsibility. In conjunction with employer match contributions, employees can add in a portion of their paychecks to save as long as they work at the company.
5. Tax-deferred Savings
A huge perk that comes with Simple IRAs is tax-deferred savings. As employees defer a portion of their salaries to the Simple IRA plan, not only will they be matched by their employer, the funds will grow tax-deferred until retirement. These funds will accumulate, pre-tax, giving an additional boost to your retirement savings.
6. Less Bureaucracy
With Simple IRAs, there is no discrimination or top-heavy testing that comes with qualified plans. Employers and employees avoid vesting schedules and tax reporting at the plan level. Additionally, they are much easier to run. There’s no need for specialization, which can eliminate the added stress that comes with retirement savings.
7. High Contribution Limits
Simple IRAs have high contribution limits. Employees can defer up to $13,000 of income. Additionally, they can contribute another $3,000 in catch-up contributions allowed if they are 50 or older (subject to cost of living adjustments). While this may be less than the $17,500 limit and $5,500 catch-up amount permitted for a 401K or other qualified plans, it is still a respectable limit.
8. Employer Tax Credit
An employer benefit comes in the form of a tax credit. Companies that offer SIMPLE IRAs can receive a tax credit for 50% of some of the administrative costs generated by the plan for the first three years. They can credit a maximum amount of $500 dollars per year for the intial three years.
9. Tax Credit for Employees
In addition to an employer tax credit, employees can also receive this benefit. If an employee’s adjusted gross income is below a certain limit, they can take a nonrefundable credit for up to $2000 of contributions each year. Qualifying employees can take advantage of this credit and boost their overall savings.
10. Investment Choices
With Simple IRAs, there are is an open pool of investment choices to pick from. While the traditional investment options like individual stocks, bonds and mutual funds are reliable standbys, employees have more wiggle room. Employees control their own investments, including where they want their fund. An employee can choose self-directed investing which allows for many more investment options. Simple IRAs allow versatility, which is a great reason to choose them as a retirement plan.
Performing Due Diligence
Selecting a retirement plan for your business doesn’t have to be a headache. You can make things easier by choosing a Simple IRA. With both employer and employee benefits, it is a low-maintenance choice that may be perfect for your small business. As always, before making any financial or investment decisions, seek out a financial advisor and discuss which plans may be right for you. Help you and your employees start saving for retirement by contacting a trusted investment expert today.