A Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) is a retirement savings option for small businesses with 100 or fewer workers. “SIMPLE” means “Savings Incentive Match Plan for Employees,” and IRA stands for individual retirement account. Employers can either contribute 2% of an employee’s pay without the employee needing to contribute or match the employee’s contributions dollar-for-dollar, up to 3% of their pay.
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In 2024, employees can put in up to $16,000 each year, which is an increase from $15,500 in 2023. This limit goes up from time to time to keep up with inflation. Workers aged 50 and above can add an extra $3,500 as a catch-up contribution, making their total possible contribution $19,500 in 2024, compared to $19,000 in 2023.
A key part of the SECURE Act of 2019 is that the government will give small employers a tax credit of up to $500 each year for three years if they set up a plan with automatic enrollment.
SIMPLE IRAs are attractive because they require very little paperwork—only a basic plan document and yearly updates for employees. The employer sets up the plan with a financial institution that manages it. The costs to start and maintain the plan are low, and employers can deduct the contributions they make for their employees on their taxes.
An employer can set up a SIMPLE IRA if they have 100 or fewer employees. Self-employed individuals and sole proprietors can also create a SIMPLE IRA. To join the plan, employees need to have made at least $5,000 in any two of the last calendar years and should expect to earn at least $5,000 this year. Employers have the option to make participation rules less strict if they want. They can also decide not to include employees who get benefits from a union.
Important Points to Remember
Employers can set up a SIMPLE IRA plan using IRS Form 5304-SIMPLE if they want employees to pick their own financial institution for their SIMPLE IRAs. If the employer prefers to choose the financial institution, they should use Form 5305-SIMPLE. Employees need to complete a SIMPLE IRA adoption agreement to start their accounts. After opening the account, employees must wait two years before transferring the funds to another retirement account.
After the plan is set up, employers must contribute to it every year unless they end the plan. They can adjust their contributions between the 2% required amount and the 3% matching amount as long as they comply with IRS regulations.
Conclusion
A SIMPLE IRA, or “Savings Incentive Match Plan for Employees,” is a retirement savings plan that offers tax benefits for small businesses with 100 or fewer employees. Employers can either match an employee’s contribution up to 3% or contribute 2% of the employee’s pay, regardless of whether the employee contributes. Contributions made by employers are reported to the IRS on Form W-2. However, there are some downsides, so it’s important to consider if a SIMPLE IRA is suitable for your small business.