Picking the right retirement vehicle can feel overwhelming. Especially as a business owner, with employees counting on you to help protect their financial futures. There’s an abundance of plans to choose from, and each has their own pros and cons.
As a firm that specializes in helping business owners, we hate watching employers spin their wheels on retirement. Or worse yet, choosing the wrong plan for themselves and their valued employees.
In this article we’re going to take a deeper look at the Savings Incentive Match Plan for Employees, or Simple IRA. We’ll cover its eligibility, benefits, drawbacks, and differences from other employer-sponsored plans like a SEP-IRA. Let’s get started.
Any employer (including those who are self-employed) may set up a Simple IRA. However, the employer must not have exceeded 100 employees that were compensated $5,000 (or more) in the previous calendar year. For this reason, Simple IRAs are best suited to smaller businesses.
According to the IRS, eligible participants for a Simple IRA include employees who:
Please note: That you have the option of reducing some of these requirements. The IRS allows for the elimination or reduction of the compensation cut offs for the past or current year. For example, if you had an employee who earned only $3,500 last year, they could still be allowed to participate in the Simple IRA plan.
Simple IRAs allow for high contributions. But this amount will change according to IRS guidelines. In 2022, employee contributions limitations on Simple IRAs include:
When it comes to employer contributions, you’ll have to choose between two methods each year and inform your employees of the decision. These include:
Compared to some other retirement options, the contribution limits for Simple IRAs are much higher. In 2022, contributions max out for standard traditional and Roth IRAs at only $6,000 each year. Whereas with a Simple IRA, you can contribute over twice this amount ($14,000)
In 2022, Simple IRAs, allow for catch-up contributions after age 50 ($3,000). Not all employer-sponsored retirement plans offer this (ex: SEP IRAs).
Contributions of any type into your Simple-IRA are tax deferred. So you’ll be able to write them off come tax time.
Simple IRAs are much easier to set up, and typically cost less to operate compared to plans like a 401(k).
Contributions limits for a Simple IRA may be higher than standard Roth and traditional IRAs, but there’s even higher limits with other plans. For example, a solo 401(k) has a staggering contribution limit of $61,000 (plus $6,500 in catch-up contributions) in 2022.
There’s also no Roth option with Simple IRAs. This means you don’t have the choice of taking the tax hit today, and withdrawing your money tax free later on.
As an employer, you are not permitted to have a separate IRA from your simple one. But with plans like a 401(k), you can.
Simple IRAs have a heavy early withdrawal penalty of 25% on any money taken out before age 59½.
Simple IRAs live up to their name by being incredibly easy to set up. You’ll start by selecting a provider (ex: Charles Schwab, Fidelity, etc.). Then you can follow the steps outlined by the IRS, to get it up and running. These include:
Please Note: The Simple IRA setup deadline falls at any point between January 1st and October 1st each year. However, if you’re a business whose formation occurred after October 1st, you may establish a Simple IRA as soon as possible.
Learn About:
At Vertical Wealth Management, we help business owners prepare for their retirements alongside their employees. That’s because we understand how stressful it can be finding the right plan on your own.
By working with our team, you’ll have a hands-on partner in evaluating your retirement options. We’ll find the plan that works best for your business, and answer any questions you may have along the way.
If you feel a Simple IRA may be right for you, have further questions, or want to explore your retirement choices, we’re here to help. Schedule your free consultation call today, and find the retirement plan that’s best for your business.
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