A SIMPLE IRA is a retirement plan that allows the self-employed and small business owners to contribute funds toward their employees savings and that of their own.
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For many small business owners, setting up an employee retirement plan is expensive, complex, and requires federal filing they’d rather not deal with. A SIMPLE IRA is a retirement savings designed for small businesses with 100 or fewer employees. The lower costs and ease of setup make it appealing for small business owners who don’t want to break the bank to provide their employees with a retirement plan.
A SIMPLE IRA offers a tax-deferred savings plan for employees at small businesses and self-employed individuals to save for retirement. SIMPLE is an abbreviation for Savings Incentive Match Plan for Employees.
This type of Individual Retirement Account (IRA) makes it optional for employees to contribute to their retirement savings while requiring employers to match their contributions or contribute a mandatory percentage to employee accounts.
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Under a SIMPLE IRA, employees and employers contribute funds to the employee’s retirement account. Employee participation is optional. Whether your workers participate or not, employers still contribute to their retirement accounts.
Employers choose between matching employee contributions by up to 3% (and no less than 1%) or making a mandatory contribution of 2%. From the start, employees are 100% vested in the SIMPLE IRA, meaning all of the contributions made to the account belong to them.
If you’re interested in providing a SIMPLE plan for your small business, self-employment, or sole proprietorship, you’ll need to fill out one of two forms with the IRS– Form 5304-SIMPLE or Form 5305-SIMPLE. This depends on whether you want to choose a financial institution for all employee plans (Form 5305) or if you want employees to choose their own bank or financial institution (Form 5304).
The contribution limits on a SIMPLE IRA are lower than other retirement savings plans. That means your employees won’t be able to save as aggressively as they would with other retirement plans, which could be a disadvantage. In 2023, SIMPLE IRA contributions are limited to $16,000. If you have employees aged 50 and older, they’re eligible to make an added catch-up contribution of $3,500 to a SIMPLE IRA plan for a total of $19,500.
For perspective, a 401(k) retirement plan has contribution limits of $23,000 in 2024, plus a $7,500 catch-up contribution limit. Under a 401(k) plan, employees under 50 years old could save a maximum of up to $7,000 more through their contributions than with a SIMPLE IRA. Employees 50 and older could save up to $11,000 more under a 401(k) plan.
The barriers to entry for a SIMPLE IRA are lower than other retirement plans, making it ideal for a budding small business that’s cautious of added costs. Is a SIMPLE IRA the right choice for your business? Let’s break down the pros and cons of this retirement plan.
Choosing a SIMPLE IRA could allow your employees to save for retirement with tax-deferred earnings while you support their savings goals through a matching contribution. It's easier to set up and maintain compared to other employer-offered retirement accounts and even costs less. However, employees who want to save aggressively for retirement might be disappointed by the lower contribution limits. Still, it’s a great option for employers who don’t want the heavy maintenance, filing requirements, and costs associated with other retirement plans.
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