SIMPLE IRA

Is a SIMPLE IRA actually simple?

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees. It is a type of retirement account for small businesses, and for people who are self-employed.

It works similarly to a Traditional IRA, where your contributions grow tax-deferred, which can harness the power of compounding interest. When it comes time for retirement, your distributions are taxed as normal income. Typically, you are in a lower tax bracket when you retire than when you are working.

A SIMPLE IRA is a benefit that can help you attract and retain talent in this competitive job market, even as a small employer.

Your company is eligible for the SIMPLE IRA if it has no more than 100 employees and does not sponsor another retirement plan. Typically, the startup costs and administration of a SIMPLE IRA are lower than a traditional 401k, but the IRA is less flexible when it comes to a few things such as eligibility, matching, and vesting periods, etc.

Why would you choose a SIMPLE IRA?

SIMPLE IRAs are ideally suited for start-ups or small businesses to give their employees a way to save for retirement.

SIMPLE IRAs allow employees to make contributions to their accounts. A SIMPLE IRA requires employers to contribute on the employee’s behalf. The employers are required to contribute a dollar-to-dollar match of up to 3% of salary, which can create an incentive for employees to save for their retirement. An employer could also do a flat 2% of pay, regardless of whether the employee continues to contribute to the account.

  • For 2018, if you are under 50 you can contribute up to $12,500. If you are over 50, you are allowed a $3000 contribution, for a total of $15,500, not including the company match portion.

Example: Sarah Smith, who works for ABC INC., earns $40,000 a year. She contributes $5,000 to her SIMPLE IRA in 2018. ABC, which chose the matching option, contributes $1,200 (3% of $40,000). Therefore, the total amount moving into Sarah’s account in 2018 is $6,200.

Continuing with the ABC INC. example, suppose that Rick Johnson, the chief shareholder, is 54 years old. Rick defers the maximum $15,500 of his salary to his SIMPLE IRA. If he earns more than $516,667 in 2017, a 3% match would be another $15,500, bringing Rick the maximum $31,000 SIMPLE IRA contribution this year.

Too Small for a retirement plan?

Tax credits for your small business is a perk of putting a retirement plan in place. Companies that sponsor SIMPLE IRAs are eligible to receive a tax credit for 50% of some of the administrative costs generated by the plan each year for the first three years of the plan’s life. There is a maximum of $500 per year on the amount that may be credited.

Depending on how your company is structured, the matching contributions that the company contributes to the employees can typically be deducted. If you are a sole proprietor, you can deduct from your personal income contributions you make to a retirement account. Either way, you or your business get a substantial income tax savings with these contributions. Please consult with a knowledgeable CPA or tax adviser.

Example: Ron, a sole proprietor, contributes $11,000 this year to a qualified retirement account. He can deduct the entire amount from his personal income taxes. Because Ron is in the 28% tax bracket, he saves $3,080 in income taxes for the year (28% × $11,000), and he has also saved $11,000 toward his retirement.

Example 2: Carrie, a part owner of ABC Corp., who makes $105,000 a year, contributes $10,500, which is 10% of her W2 income, this year to a qualified retirement account. The W-2 Carrie gets from her employer should not include her SIMPLE IRA contributions as taxable income. Because Carrie is in the 30% tax bracket, she saves $3,150 in income taxes for the year (30% × $10,500), and she has also saved $10,500 towards her retirement.

ABC Corp, does a 3% match, which is an additional $3,150 in Carrie’s account for a total of $13,650. ABC Corp, can deduct Carrie’s contribution on their tax return a well, as the company may deduct all contributions made to employees’ SIMPLE IRAs on their corporate tax return.

The deadlines for setting up a SIMPLE IRA or a Safe Harbor 401(k) for 2018 is October 1st, 2018. But don’t wait until a few days before the deadline to set up your plan; it can take a few weeks or more to set up your plan.

If you missed the October 1st, deadline, all is not lost, you can set up a SIMPLE IRA for 2019 or look at a traditional 401k for 2018.

Whether you’re a business owner seeking a retirement plan for your employees or are self-employed, the SIMPLE IRA plan could be the answer to your retirement needs. This is especially true if you work alone but eventually want to run a bigger business.

Martin Financial Group works with businesses in Kentucky and Southern Indiana and can help you determine what type of employer sponsored plan is right for your business.

This article is for educational purposes only, each person’s situation is unique, and this article should not be taken as advice.

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Sarah Cattan is a 401k specialist and focuses on business owners and their retirement plans.