SIMPLE IRA
Contents
Unlocking the Benefits of a SIMPLE IRA: A Comprehensive Guide
Understanding the Basics of SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement savings plan tailored for small businesses with 100 or fewer employees. It offers tax-deferred growth and flexible contribution options, making it an attractive choice for employers seeking to provide retirement benefits to their workforce.
Key Insights into SIMPLE IRA
- With minimal paperwork and low administrative costs, SIMPLE IRAs are easy to set up and manage, making them ideal for small businesses.
- Employees can contribute up to $13,500 annually in 2021 ($14,000 in 2022), with an additional catch-up contribution of $3,000 for those aged 50 and older.
- Employers may choose between a non-elective contribution of 2% of the employee's salary or a dollar-for-dollar matching contribution of up to 3% of their salary.
Exploring Special Considerations
To establish a SIMPLE IRA, employers must file IRS Form 5304-SIMPLE or Form 5305-SIMPLE, depending on whether they allow employees to choose their financial institution. Eligible employees must have earned at least $5,000 in compensation in the previous two years and are expected to earn the same in the current year.
Drawbacks of SIMPLE IRA
While SIMPLE IRAs offer simplicity and tax advantages, they come with limitations. Business owners cannot save as much for retirement compared to other plans like SEP IRAs or 401(k) plans. Additionally, a two-year waiting period is required before rolling over a SIMPLE IRA into a traditional IRA.