A Savings Incentive Match Plan for Employees (SIMPLE IRA) is a retirement plan that may be established by employers, including self-employed individuals. The SIMPLE IRA allows eligible employees to contribute part of their pretax compensation to the plan.
Employees can exclude the entire contribution from current income and the employer is allowed a tax deduction for all plan contributions.
The employee is immediately vested, meaning any money contributed to a SIMPLE IRA belongs to the employee. If they leave the company for any reason, all retirement contributions go with the employee.
SIMPLE IRA plans are cost-effective and easy to establish and maintain.
Eligibility
Any small business that employs no more than 100 employees (including self-employed individuals who received income from the employer), have earned at least $5,000 in compensation in two preceding years, and can expect to earn at least $5,000 during the current year can establish a SIMPLE IRA plan, provided the business does not concurrently maintain any other employer-sponsored plan.
Tax Features
Employer contributions are deductible to the employer.
Employee contributions are pre-tax salary reduction contributions, reducing current federal income tax.
SIMPLE IRA contributions grow tax-deferred.
Contribution Details
Employers can elect to either match the employee’s salary reduction contributions dollar-for-dollar up to 3% of pay or to pay a 2% non-elective contribution for each eligible employee regardless of whether the employee contributes to their SIMPLE IRA. Employers can switch between these options each year provided certain requirements are met.
Employees can elect to contribute up to 100% of compensation up to a maximum of $16,000 in 2024 ($15,500 in 2023) through salary reduction. In addition, participants age 50 and older may be able to increase this maximum to $19,500 for 2024 ($19,000 for 2023).
All employee contributions must be made within 30 days following the month in which the amounts would have be paid to the employee. Employer matching and non-matching contributions must be made by the company’s federal tax return due date, including extensions.
Investment Minimums
The minimum investment to open a SIMPLE IRA at Davis is $1,000.
Making Distributions
Distributions are taxed as ordinary income in the year received. Premature distributions, where the participant has not reached the age of 59 ½, are subject to a 10% early withdrawal penalty. The 10% early withdrawal penalty may be waived in certain situations. The following examples are exceptions to the 10% early withdrawal penalty but are not limited to:
- Distributions due to disability
- Distributions for first time homebuyer up to a $10,000 lifetime limit
The early withdrawal penalty is increased to 25% if funds are withdrawn within 2 years of beginning participation in the SIMPLE IRA.
Required Minimum Distributions
Assets can not be kept in a SIMPLE IRA indefinitely. The assets that need to be withdrawn each year are called Required Minimum Distributions (RMD). An individual must begin removing money from the SIMPLE IRA account by April 1st of the year following age 72. The SECURE Act 2.0 of 2022 changed the age from 72 to 73 and applies to individuals who reach age 72 after December 31, 2022. Failing to take the minimum distribution will result in a 25% excise tax on the amount that should have been withdrawn. If corrected in a timely manner, the excise tax will be reduced to 10%. The RMD will still need to be withdrawn and income taxes paid on the distribution.
Additional Information
Please consult your tax advisor before establishing this type of account.
Please review the Simple IRA Disclosure and Custodial Agreement for complete SIMPLE IRA account details including fees.