A SIMPLE IRA is a retirement program that is easy-to-administer and salary-deferred. It is for employees with an employer match option. Consider a SIMPLE IRA if your business has steady income and your employees want to make contributions to a retirement plan. Employers with 100 or fewer eligible employees who did not maintain another retirement plan are eligible to establish a SIMPLE IRA.
Each eligible employee can decide whether or not to participate and how much to contribute. Employer contributions are mandatory. Employee contributions are optional. Employees may contribute up to 100% of compensation or a maximum of $13,000 for tax year 2019 and $13,500 for tax year 2020. Participants age 50 and over may contribute up to $16,000 for tax year 2019 and $16,500 for tax year 2020.
The employer matches employee salary contributions dollar-for-dollar up of up to 3% of compensation (this can be reduced to 1% in any two out of five years), or a makes non-elective contribution of 2% of compensation for all eligible employees (including those who decide not to contribute for themselves). The compensation cap for determining the employer non-elective contribution amount $280,000 for tax year 2019 and $285,000 for tax year 2020.
Funds cannot be removed from the SIMPLE IRA until it has been established for at least two years. Withdrawals from a SIMPLE IRA after two years are still subject to federal income tax and/or a tax penalty.
Key Benefits of SIMPLE IRAs:
- Simple administration and low administrative costs. No maintenance or account fees
- No employer tax filings
- No IRS contribution testing
- Employees can make contributions
- Does not limit eligibility or employee access to funds
Eligibility Requirements for the Plan Sponsor
This plan is generally suitable for businesses with 100 employees or fewer. It's usually available when other tax-favored plans are not permitted.
Set-Up and Funding
A SIMPLE IRA must be established prior to October 1. The employer contribution (match or non-elective) must be made by the employer's tax return due date, plus extension. All contributions are reported in the tax year received on tax form 5498.
A copy of the IRS Form 5305-SA, and either 5305-SIMPLE or 5304-SIMPLE, must accompany the account application. Employer contributions are tax-deductible.Open New Account