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Simple IRA Retirement Plan

Simple IRA Retirement Plan

Savings Incentive Match Plan for Employees Individual Retirement Arrangements

Qualified plans, often referred to as "qualified retirement plans," typically include 401(k) plans, 403(b) plans, and defined benefit pension plans. These plans must meet specific requirements under the Internal Revenue Code to qualify for certain tax benefits and protections.

SEP IRAs (Simplified Employee Pension Individual Retirement Arrangements) and SIMPLE IRAs (Savings Incentive Match Plan for Employees Individual Retirement Arrangements) are retirement plans for small businesses and self-employed individuals. While they offer tax advantages and are used for retirement savings, they have different rules and requirements compared to a qualified plan.

A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement savings plan designed for small businesses. Here's what you can and cannot do with a SIMPLE IRA:

What You Can Do with a SIMPLE IRA:

  1. Contribute Pre-Tax Income: As an employee, you can contribute a portion of your pre-tax income to your SIMPLE IRA account. For 2022, the contribution limit is $14,000. If you're 50 or older, you can make an additional catch-up contribution of up to $3,000.

  2. Employer Matching Contributions: Employers are required to make either matching contributions or non-elective contributions to their employees' SIMPLE IRAs.

    • Matching Contributions: If your employer chooses this option, they will match your contributions up to a certain percentage of your salary, typically up to 3%.
    • Non-Elective Contributions: Alternatively, your employer can make non-elective contributions of 2% of your compensation for all eligible employees, regardless of whether employees make contributions themselves.
  3. Immediate Vesting: You have immediate and full ownership of all contributions to your SIMPLE IRA, whether made by you or your employer. This means you're always fully vested in your account.

  4. Tax-Deferred Growth: Investments in your SIMPLE IRA grow tax-deferred until you withdraw the funds in retirement. This means you won't owe taxes on the earnings until you take distributions.

  5. Flexible Investment Options: You have control over how your SIMPLE IRA funds are invested. Typically, financial institutions offer a range of investment options, such as mutual funds, stocks, bonds, and more.

  6. Portability: If you change jobs, you can roll over your SIMPLE IRA funds into another eligible retirement account, such as a Traditional IRA, without incurring taxes or penalties.

What You Cannot Do with a SIMPLE IRA:

  1. Early Withdrawals: If you withdraw funds from your SIMPLE IRA before age 59½, you generally have to pay a 10% early withdrawal penalty on the amount taken out in addition to regular income tax. Some exceptions apply, such as for certain medical expenses and first-time home purchases.

  2. Exceed Contribution Limits: You cannot contribute more than the annual limits set by the IRS. Attempting to exceed these limits can result in penalties.

  3. Borrow from Your Account: Unlike other retirement plans, you cannot take loans or borrow money from your SIMPLE IRA.

  4. Contribute if You're Over 72: Once you reach age 72, you must start taking required minimum distributions (RMDs) from your SIMPLE IRA, just as you would with a Traditional IRA. You cannot make new contributions after this age.

  5. Use it as a Business Loan: Employers cannot use funds from a SIMPLE IRA to meet their business expenses. The funds are intended solely for employees' retirement savings.

  6. Neglect Reporting Requirements: Employers must follow IRS reporting requirements, including providing employees with annual statements detailing their contributions and account balances. Neglecting these requirements can result in penalties for employers.

  • The employer must contribute using one of two methods (3% matching contribution or 2% nonelective contribution.
  • Salary reduction contributions are subject to FICA and federal unemployment (FUTA) taxes. 
  • Matching and non-elective contributions are not subject to these taxes. Contributions are not subject to federal income tax withholding.
  • 25% penalty for early distribution within the first two years of his participation in the plan  (after that, it is 10% before age 59.5)
  • The additional catch-up contribution limitation for SIMPLE plans is $3,000 for 2022. (Age 50 or Older)
  • In 2022, if an employee takes part in multiple employer-sponsored plans and opts for elective salary reductions in those plans, the total combined salary reduction contributions they can make across all plans are capped at $20,500 

Who Can Set up a SIMPLE IRA Plan?

Employers, including self-employed individuals, can set up a SIMPLE (Savings Incentive Match Plan for Employees) IRA plan. It is primarily designed for small businesses with 100 or fewer employees.

Who Can Participate in a SIMPLE IRA Plan? Excludable Employees.

Most employees who received at least $5,000 in compensation from the employer in the previous two years and are expected to receive at least $5,000 during the current year must be allowed to participate.

Employers can exclude employees who:

  • Have not earned at least $5,000 in any of the previous two years.
  • Are covered by a union agreement, and retirement benefits were bargained for in good faith.
  • Are nonresident aliens earning no U.S. source income?

Employers can choose less restrictive eligibility requirements if desired.

How To Set up a SIMPLE IRA Plan

  • Choose a Financial Institution: The employer selects a financial institution to serve as the trustee or custodian for the SIMPLE IRA accounts.
  • Adopt a Written Plan: The employer must establish a written plan document that outlines the details of the SIMPLE IRA plan, including how contributions will be made and matching or nonelective contributions.
  • Notify Eligible Employees: Employers must provide information about the plan, including eligibility criteria, contribution limits, and the employee's rights.
  • Set up SIMPLE IRA Accounts: Employees must set up their SIMPLE IRA accounts with the chosen financial institution.

Contribution Limits

  • For 2022, employees can contribute up to $14,000 to their SIMPLE IRA accounts.
  • Participants who are 50 or older can make additional catch-up contributions of up to $3,000, making their total contribution limit $17,000.

When To Deduct Contributions

  • Employer contributions (matching or nonelective) to the SIMPLE IRA plan are tax-deductible for the year they are made.
  • Employee contributions are made on a pretax basis, meaning they reduce the employee's taxable income for the year in which they are contributed.

Tax Treatment of Contributions

  • Employer contributions to a SIMPLE IRA plan are tax-deductible for the employer.
  • Employee contributions are made through salary deferrals and are not taxed until they are distributed from the plan, typically at retirement.
  • Investment earnings in a SIMPLE IRA account grow tax-deferred until withdrawal.

Employers need to follow IRS rules and requirements when setting up and maintaining a SIMPLE IRA plan to ensure compliance with tax laws and regulations. Additionally, the rules can change over time, so it's advisable to consult with a tax professional or financial advisor to ensure the accurate setup and operation of the plan.