If you own or work for a small business, you can access a special kind of individual retirement account (IRA). Right off the top, the Savings Incentive Match Plan for Employees (SIMPLE) IRA lives up to its name by being easier to set up and administer. It also offers real benefits to both small business owners and employees.
Good Life Morehead City is a financial advisory company that is passionate about guiding you toward security, prosperity, and financial knowledge. The financial advisors at Good Life Morehead City can help you if you’re an employer looking for a plan or an employee with questions about retirement plans.
Here’s a look at the benefits of SIMPLE IRAs.
What Is a SIMPLE IRA?
A SIMPLE IRA is a retirement savings account that small businesses with fewer than 100 employees can set up to help the business owner and employees put money away for retirement. To be eligible to set up a SIMPLE IRA, you must not offer employees any other retirement plans.
A SIMPLE IRA shares several traits with a traditional IRA. In particular, it allows employers and employees to make contributions that can grow over time and don’t require you to pay taxes until the money is withdrawn.
Employers are required to contribute to employees’ accounts with either a matching contribution of up to three percent or a flat two percent of an employee’s salary, even if an employee doesn’t contribute any money. Employers only put in a matching contribution if an employee also contributes.
As of 2024, the annual employee contribution limit is $16,000, up from $15,500 in 2023. If you’re 50 years or older, you can contribute an additional $3,500 per year in catch-up contributions.
With a SIMPLE IRA, you can invest your money in:
- Stocks
- Bonds
- Mutual funds
- Other similar investments
Depending on an employer’s plan, an employer or an employee can set up a SIMPLE IRA with a bank, insurance company, or another financial institution approved by the Internal Revenue Service. That institution becomes the plan’s trustee.
SIMPLE IRA Benefits for Employers and Employees
If you’re an employer, putting away money for retirement might be of particular concern. Since you own your own business, you no longer have access to a large corporation’s 401(k) plan. And if you’re an employee in a small business, you might share your boss’s concerns about retirement planning.
The SIMPLE IRA can help in both situations. It offers benefits for employers and employees alike.
Employer Benefits
As an employer, there are several good reasons to offer a SIMPLE IRA in your workplace. In addition to being easier to start and run than other plans, SIMPLE IRAs allow you to:
- Save money for retirement
- Attract and retain workers
- Take advantage of lower start-up and annual costs than other plans
- Deduct contributions from your taxes
You also don’t need to make a special tax filing for your company’s SIMPLE IRA.
Employee Benefits
As an employee, the SIMPLE IRA offers several benefits to you, too. For instance, this plan enables you to:
- Reduce your current tax burden through your contributions
- Have your contributions and any growth be tax-deferred until you withdraw them
- Receive a 2–3% contribution from your employer
- Be immediately 100% vested in all contributions
- Own all contributions, including your employer’s, if you leave
- Contribute to other retirement accounts while investing in an employer’s SIMPLE IRA
A SIMPLE IRA can also become a great source of retirement income. With these many potential benefits, it’s easy to see why SIMPLE IRAs are popular among small business owners and their workers.
Disadvantages of SIMPLE IRAs
SIMPLE IRAs provide a lot of positives for employers and employees. However, they also have a few drawbacks that you should remain aware of.
To start, SIMPLE IRAs have lower annual contribution limits than other options that self-employed business owners could choose. For instance, 401(k)s and Simplified Employee Pension (SEP) IRAs both offer higher caps.
You also cannot take a loan against your SIMPLE IRA, and tax penalties can apply to early withdrawals. If you withdraw money before 59 ½, you must pay a 10% tax. If you withdraw money before 59 ½ within the plan's first two years, that penalty jumps to 25%.
Talk to a Financial Advisor About SIMPLE IRAs
If you’re a small business owner or work in a small business, you may want to learn more about SIMPLE IRAs. At Good Life Morehead City, we strive to truly understand your financial situation so that we can offer you personalized guidance in your retirement planning journey. Give us a call today.