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SIMPLE IRA

What is a SIMPLE IRA plan?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is a retirement savings plan adopted by a business that allows both employers and employees to make retirement savings contributions. Each eligible employee sets up a SIMPLE Individual Retirement Account (SIMPLE IRA) to receive the SIMPLE IRA plan contributions.

 

What are the benefits of a SIMPLE IRA plan?

A SIMPLE IRA plan is easy to establish, simple to administer, and inexpensive compared to other types of retirement plans, such as 401(k) plans. There are no compliance tests and employers are not required to file annual reports with the IRS. Employees share the responsibility of funding the plan with their employers.

 

Can any employer establish a SIMPLE IRA plan?

Any type of employer, including a self-employed individual, can establish a SIMPLE IRA plan, but the employer must generally have 100 or fewer employees. When calculating the 100-employee limit, employers count individuals employed by the business during the previous calendar year who earned $5,000 or more. Employers adopting SIMPLE IRA plans are also restricted from having any other type of employer-sponsored retirement plan (e.g., 401(k) plan).

 

How do I establish a SIMPLE IRA plan?

Establishing a SIMPLE IRA plan requires three steps:

  • The employer must sign a written SIMPLE IRA plan document. The IRS offers free SIMPLE IRA plan documents that can be used to adopt the plan. IRA custodians also provide SIMPLE IRA plan documents.
  • The employer must notify each eligible employee that the SIMPLE IRA plan has been established and provide them with information about the plan.
  • Each eligible employee must set up a SIMPLE IRA that will receive the contributions.

 

Can I require all employees to open a SIMPLE IRA with the same IRA custodian?

If you establish the SIMPLE IRA plan with a document that names a designated financial institution (DFI), all contributions will be made to SIMPLE IRAs held at that institution. If the document does not specify a DFI, employees can establish their SIMPLE IRAs at any financial institution they choose. If you use a DFI, employees must be permitted to transfer their balance without cost or penalty to another SIMPLE IRA. For simplicity and ease of administration, many employers use a DFI.

 

What is the deadline to establish a SIMPLE IRA plan?

A SIMPLE IRA plan can be set up any time between January 1 and October 1 in the year you first adopt the plan. For example, an employer that wants to make a SIMPLE IRA plan contribution for 2017 would generally have until October 1, 2017, to set up the SIMPLE IRA plan. A new business that is established after October 1 may adopt a SIMPLE IRA plan as soon as administratively feasible after the business comes into existence.

 

Which employees do I need to cover?

Your SIMPLE IRA plan must cover all employees who

  • earned $5,000 or more in compensation in any 2 preceding calendar years, and
  • are reasonably expected to earn that much in the current year.

You can choose to apply less restrictive eligibility requirements.

 

Are there employees I can exclude from my SIMPLE IRA plan?

Employees who are covered by a collective bargaining unit or who are nonresident aliens with no U.S. source income can be excluded, along with employees who haven’t met the eligibility requirements.

 

How much can be contributed to a SIMPLE IRA plan?

Each year, employees can defer up to $12,500 (for 2017), plus an additional $3,000 (for 2017) catch-up contribution if they are age 50 or older. An employer is required to make either a matching contribution (dollar-for-dollar up to 3% of salary deferred into the plan), or a nonelective contribution (2% contribution for all eligible employees). The 3% matching contribution can be reduced to as low as 1% for 2 out of every 5 years, subject to certain employee notice requirements. Employer matching or nonelective contributions are deductible on your business tax return.

 

Does the SIMPLE IRA plan limit the amount I can contribute to my IRA?

A SIMPLE IRA plan does not affect your ability to make annual contributions to a traditional or Roth IRA. In addition to your SIMPLE IRA contributions, you can make traditional or Roth IRA contributions of up to $5,500 (for 2017), plus a $1,000 catch-up contribution if you are age 50 or older. Participating in a SIMPLE IRA plan may affect your ability to take a tax deduction for a traditional IRA contribution, depending on your income.

 

When can I take money out of my SIMPLE IRA?

You can take distributions from your SIMPLE IRA, including employer matching or nonelective contributions, at any time. The distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution penalty if you are not yet age 59½. The early distribution tax rises to 25% for distributions taken within 2 years after the first contribution to your SIMPLE IRA.