Last Updated on January 15, 2024 by Ben
SIMPLE IRAs have many benefits compared to traditional IRAs, making them an excellent choice for small business owners who want to provide a secure future for themselves and their employees. These benefits include lower contribution limits, more control over how funds are invested, a more straightforward administration process, and less paperwork than other IRAs.
What is a SIMPLE IRA?
A SIMPLE IRA is a plan for retirement for tiny businesses with less than 100 employees. It is easy to set up, and the company can contribute to it. You can also put money in the IRA if you are an employee of a small business. A traditional IRA also has a lot of rules, but not as many as the 401(k). There are lower limits for an employee contribution.
This is a retirement savings plan designed specifically for small businesses in the U.S. It is administered under some of the same guidelines as other individual retirement accounts, but with a few exceptions. This retirement account is a place where you can save money. You and your employer put some of your money into it. You will get money for this when you retire.
Small businesses sometimes offer workers this plan instead of a 401(k). This is because it is easier to set up and administer, as the acronym implies. If you work for yourself, you can put money into a SIMPLE IRA. There are also other retirement plan options that might be better for people who work for themselves.
Pros and Cons of a SIMPLE IRA
Retirement plans are essential, but it’s equally as critical to know the downsides. Learning about both the good and bad parts of a plan can help you decide which one is best for your business.
More Flexibility and More Options
With this plan, you do not have to work at that company for a certain number of years before the money in the account is yours. That is different from some employer-based retirement plans like a 401(k) or 403(b).
Whatever money your employer gives to a SIMPLE IRA, which is contributed before tax or after-tax, is immediately vested. That plainly means every dollar that’s put into your account is yours, and you can take it with you wherever you are.
A 401(k) plan is a type of retirement account. The name comes from the section of the Internal Revenue Code that created this kind of account. A Savings Incentive Match Plan for Employees of Small Employers is one way to save money for retirement.
Easier and Cheaper to Set Up and Operate
A Savings Incentive Match Plan for Employees — is an attractive option because they’re less expensive to set up and run than a 401(k) plan. That is because they have cheaper administrative costs and fewer regulations to worry about. They are very happy that there are not many rules.
Plenty of Tax Advantages
A small business owner can get a tax deduction when he or she contributes money to an employee’s account. That will help with the taxes that you have to pay this year.
There’s No Roth Option for SIMPLE IRAs
Sadly, there is not a Roth IRA option available for SIMPLE IRA plans. Employees and employers would both enjoy tax-free growth and tax-free withdrawals in retirement if this was an option. As your busuness grows, you might want to consider introducing a new plan. This is called a Roth 401(k), and it is different from the SIMPLE IRA plan.
Lower Contribution Limits
The donations max out at $13,500 for most workers. That’s a few thousand dollars smaller than the contribution limit for a regular 401(k) plan, but it’s still an awesome place to start!
Plus, you are allowed to save for retirement in other places at the same time. You can also put money into a workplace retirement plan if you have one at your job. If you do not have a workplace retirement plan, then you can open a Roth IRA outside of work!
Beware of Steep Withdrawal Penalties
Gaining money out of your SIMPLE IRA (or any retirement account) is the last resort. It could be very bad if you go bankrupt or lose your house. You will have to pay a big penalty for withdrawing from it within two years of opening it. If you want to save money for a long time, you should put it in your account. That way, you won’t spend it on things you don’t need.
If you make a rollover to something other than another this plan, you will be charged a 25% penalty.
SIMPLE IRA Rollover Rules & Limitations
You cannot transfer money from a SIMPLE IRA account to a traditional IRA account within the first two years after you open this plan. The two-year time limit starts the day you put money into your plan or when your employer does. You can’t take money out of this plan within the first two years, but you can roll it over to a new one.
A transfer to any other IRA in the first two years is a SIMPLE IRA withdrawal or distribution. This means that you will be punished with a 25% tax penalty and regular income tax. After you have been in this retirement plan for two years, you can take it out and put it into a traditional IRA. You will not be taxed for withdrawing the money from your plan, and there is no penalty.
After two years, you can move the money to a traditional IRA. This will not matter if you are still working for your employer or what your age is. For example, there are some things you can’t do when you have a 401(k). You can’t take the money out of the 401(k) before you leave your job. You need to be 59 1/2 or be disabled for this.
Both types of IRA are pre-tax retirement plans. That means that if you roll over money from one to the other, you do not have to pay taxes on the money. But, if you still have to report it on your tax return. On the form, you will report your money as a nontaxable IRA distribution. You will also write “0” in the box that says “taxable amount.” This tells the IRS that it is a transfer and not income.
You can rollover the funds from your SIMPLE IRA once within 12 months. If you take a second distribution in the same year, then you cannot roll it over again. For example, if you complete a rollover in January and take another distribution in June of the same year, then the second distribution cannot be rolled into your IRA.
As with other types of IRAs, if you are rolling over your money from a SIMPLE IRA, it is usually best to have the funds sent directly between banks. If you take money from your IRA and don’t put it back in a new IRA within 60 days,it will be rendered as withdrawal. You will have to pay taxes on the money.This plan has the same rules as other types of retirement plans. The main thing for some businesses that have a SIMPLE IRA might be that they need to pay into it themselves. Employees might like the employer match, but they may not be happy about some of the other things. They might not like that there are lower contribution limits than with 401(k)s, and they may not like the idea of Roth versions.
Employers must contribute a certain amount to the SIMPLE IRA account. This is different from other employer-sponsored retirement plans.
In 2020 and 2021, the employee contribution limits for this plan is $13,500 per year if you are under age 50. If you are on top of the age of 50, there is an additional $3,000 catch-up contribution.
Employer contributions are mandatory. They can be made using one of two methods.
- This company will give you 3% matching contributions for your pay, up to the limit. You can’t go over this amount.
- If you make contributions, you will see more money in your paycheck. You need to contribute a percentage of your salary. The amount is 2% for people who earn up to $285,000 in 2020 and $290,000 in 2021.
SIMPLE IRA vs. Traditional IRA vs. SEP IRA vs. Other Retirement Accounts
Simple IRAs share some similarities with traditional IRAs. Contributions are tax-deferred, meaning the amount you save up to your contribution limit reduces your taxable income for the year, and investment growth is tax-deferred until you start taking distributions in retirement.
In some ways, these plans are like 401(k) plans. A person can choose how much money they want to put in the plan each time they get a paycheck. If someone chooses this, then their money is automatically sent to an individual investment account that belongs only to them.
If you are the owner of a small business, you can choose between two types of retirement plans. One is SIMPLE IRA, and another is SEP-IRA. They are both similar but have differences too.
The SIMPLE IRA allowable contribution limit is $13,500 with the allowance of an additional catch-up of $3,000. A SEP-IRA can be up to 25% of salary or up to $57,000, depending on which amount is less.
A SEP-IRA is a good choice for a company with less than 100 employees. It allows the employer to adjust contributions based on how much money they have. SIMPLE IRAs can be used by any company of any size.
Types of Gold You Can Invest in Through a SIMPLE IRA
A SIMPLE IRA is an investment that you can put your money. If you have a lot of money, you can invest in many different things. But the person who is managing your plan decides what type of things you can invest in. You can make investments, but legal says that you can only invest in these types of things:
- Individual stocks
- Individual bonds (corporate or government)Options
- Mutual fund shares
- Exchange-traded fund (ETF) shares
- Certificates of deposit (CDs)
- Real estate
- Precious metals bullion
The SIMPLE IRA can have the same investment choices as the SEP-IRA. For example, you can invest in a traditional IRA with a normal investment option. You also have the option to invest in commodities, which is not very common.
The investments are restricted by the plan custodian. These are one of the very few accounts that allow for physical gold, silver, platinum, or palladium bullion investments.
Investors also have the option to choose “paper gold.” This is popular in the industry as physical gold and does not offer an actual ownership stake in any company. These investments can be bought as stocks or individually, but most often, they are found through a package of stocks (ETF) or index funds.
The value of these companies is connected to the price of gold or other precious metal. So if the price changes, the price of these companies could also change.
SIMPLE IRAs are a great alternative for small employers who don’t want the bureaucratic and fiduciary complexities that come with qualified plans. Employees get tax incentives, immediate vesting of employer contributions, and more flexibility in how they invest their retirement funds.