What is a SIMPLE IRA?
Who can establish a SIMPLE IRA plan?
Any employer (including self-employed individuals, tax-exempt employers and governmental entities) that has no more than 100 employees who earned $5,000 or more in compensation during the preceding calendar year (the "100-employee limitation") can establish a SIMPLE IRA plan.
SIMPLE IRA Annual Contributions
An employee may defer up to $12,000 in 2018. Employees age 50 or over can make a catch-up contribution of up to $3,000 in 2018. The salary reduction contributions under a SIMPLE IRA plan are "elective deferrals" that count toward the overall annual limit on elective deferrals an employee may make to this and other plans permitting elective deferrals.
Why Establish a SIMPLE IRA?
SIMPLE IRA plans have proven to be a popular retirement plan option for small businesses that have shied away from the complexities of a 401(k) qualified retirement plan.
1. Cost Effective: A SIMPLE plan is generally less costly and administratively burdensome then the majority of company sponsored employee retirement plans. For example, there is no annual IRS Form 5500, Annual Return/Report of Employee Benefit Plan, reporting requirements or bonding requirements like a 401(k) qualified retirement plan
2. Flexible Contributions: Contributions to a SIMPLE plan are flexible as the employer can set the percentage amount that would apply to all eligible employee SIMPLE IRA contributions. Unlike, a 401(K) qualified retirement plan, there are no ERISA or Safe Harbor rules to satisfy.
3. Employee Access: With a SIMPLE IRA, the employee would have access to the assets at all time. Unlike a 401(k) qualified retirement plan, no triggering event is required for an employee to access their retirement funds.
4. Employee Control. With a SIMPLE IRA, the employee would generally have greater control over the retirement assets as a result of the assets being held in an IRA and not in a trust. The level of control the employee would have over the SEP IRA assets would be based off the IRA custodian holding the assets and the type of available custodian approved investments
5. Tax-Deferred Earnings: Earnings generated on SIMPLE IRA remain tax-deferred until distributed.
Disadvantages of Establishing a SIMPLE IRA vs. Other Retirement Plans
1. Limitation of Annual Contributions: An Individual 401k may provide a larger contribution compared to a SIMPLE IRA at the same income level.
2. Loans are not permitted
3. Rollover limitation: A distribution from a SIMPLE IRA during a two (2) year-period qualifies as a rollover contribution (and thus is not includable in gross income) only if the distribution is transferred into another SIMPLE IRA and satisfies the other requirements of section 408(d)(3) for treatment as a rollover contribution. During the 2-year period , one may transfer an amount in a SIMPLE IRA to another SIMPLE IRA in a tax-free trustee-to-trustee transfer. If, during this 2-year period, an amount is paid from a SIMPLE IRA directly to the trustee of an IRA that is not a SIMPLE IRA, then the payment is neither a tax-free trustee-to-trustee transfer nor a rollover contribution.