A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a retirement plan for small businesses that might not have the resources for a more extensive plan like 401(k) but still want to offer retirement benefits to their employees. It is for businesses that have 100 or fewer employees.
Key aspects of SIMPLE IRAs:
- They are a pre-tax investment account, meaning that the money you place in this account is deducted from your check before taxes are collected.
- With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.
- In 2021, the yearly contribution limits are $13,500 per year for those under age 50. People 50 and older can make an additional $3,000 catch-up contribution.
- Employers must allow all employees at least $5,000 in compensation in the last two years to participate, excluding employees covered by a union agreement and non-US citizens.
- Employers must match contributions. They either can have a mandatory match or non-elective contribution- mandatory is 3%, or non-elective is 2%. But they never have to match beyond that 3% which can be less than most 401(k) plans.
- You are 100% vested whenever the employer deposits contributions into your account. Unlike 401(k) plans, vesting happens when the funds hit your account, not on a vesting schedule based on years of employment.
- Investment options are almost anything- individual stocks, mutual funds, ETFs, or CDs.
- Investment control can be at an employer chosen institution, or some plans allow their employees to select the institution or participate in self-directed investing.
- If you try to cash out or roll over a SIMPLE IRA less than two years after it was opened instead of the standard 10% penalty of a 401(k) account, 403(b) account or Traditional IRA, or Roth IRA, you will be subject to a 25% penalty in addition to ordinary income tax.
- You can take the money with you. After the account has been opened for two years, you can roll it over to another pre-tax IRA account or traditional 401(k), 403(b), or 457(b) plans. If you cash the account out at this point, you will pay a 10% penalty on top of the 10% taxes you will owe.
- The earliest you can make penalty-free withdrawals is 59 ½. There are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased SIMPLE IRA owner or the withdrawal is the result of an IRS levy.
- Required Minimum Distributions (RMDs) need to start April 1 of the year following the calendar year in which you reach age 70½, if you were born before July 1, 1949, or April 1 of the year following the calendar year in which you reach age 72, if you were born after June 30, 1949. RMDs are required even if you are still working.
Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.