Tag: SIMPLE IRA

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.

Understanding the Required Minimum Distribution

The Required Minimum Distribution

If you turned 70 on or before June 30th, 2018, you have moved into a new phase of retirement planning.  The IRS may now require that you take a minimum distribution from your retirement accounts beginning this year.

What is the RMD and when does it need to be taken?

RMD is an amount of money that is required to be removed from your qualified accounts each year.  The IRS allowed for money to be added over the years into a qualified retirement account [IRA, 401(k), 403(b), etc.] before tax and allowed the assets to accumulate tax deferred. The RMD is a way for the IRS to make sure that the account that you have deferred tax on to this point is withdrawn over your lifetime, or the lifetimes of your beneficiaries, so that the amount becomes taxable.

Each person with a qualifying account is required to make their first distribution by April 1st of the year following the year they turn 70.5.  After the first year, you are then required to take a distribution from the account by December 31st of each following year.

Example:

Stan is 70.5 on April 30th, 2018 and is now subject to the RMD rules. He is required to take a distribution for 2018 on or before April 1st, 2019.  He is also required to take a distribution for 2019 on or before December 31st, 2019 and so on.

If you are already taking a distribution that is greater than or equal to your RMD for a given year then that distribution completes your requirement.  If you are taking less than the RMD for a given year you will need to increase your distribution for that year to meet the minimum.  You can take this distribution in one lump sum, in monthly increments, or in any other fashion you like as long as it is all taken by the required date.

Which accounts does it affect?

Accounts that had assets added to it on a pretax basis and that have grown tax deferred are going to be subject to the RMD rules.  This includes IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s and 403(b)s.

If you are working past 70.5, you cannot make contributions to an individual plan and you must start the RMD for those plans.  However, if you are 70.5 years old and still working at an employer that has a qualified employer plan, you may add to this plan and you do not have to take an RMD from that plan as long as you are not more than 5% owner of the company.

If you have both account types, are 70.5 and still working, you do have to take an RMD from your individual accounts but you do not have to take from your employer plan.  You are allowed this exemption to the rule while you are working.  Once you stop working the employer plan is now subject to the RMD rule.

Example:

Stan is still working with an employer that has a 401(k) and he has a balance in the plan of $500,000. He also has $500,000 in an IRA.   The IRA is going to be subject to the RMD and he will be required to take the minimum distribution from the account annually.  The 401(k), on the other hand, is not subject to the RMD because he is still employed at that company that holds the 401(k).

When Stan leaves the company both the IRA and the 401(k) are subject to the RMD rule and he is now required to take the minimum from both accounts.  It makes no difference whether Stan leaves the money in the 401(k) or moves it to the IRA, the RMD amount is the same and is required for both accounts.

How is it calculated?

Many people believe that the RMD is calculated as a percentage of the account value but that is not the case. To calculate your RMD simply take your account balance on December 31st of the previous year and divide it by the number that corresponds to your age at the end of the year on this IRS RMD Table.  Each individual account has its own RMD so you will want to calculate each account separately. If you are not comfortable performing the calculation yourself or want to double check, there are many online RMD calculators available.

Example:

Stan turned 70.5 on April 30th, 2018 (so he will be 71 by December 31st, 2018).  Let’s also assume that he is not working and has an IRA with an account balance of $500,000 on December 31st, 2017, held at one custodian and another IRA account with $200,000 on December 31st, 2017, held at another custodian. To calculate his RMD for 2018 he would go to the IRS RMD table and find the divisor that corresponds to his end of year age of 71.  Use this divisor to divide the account balances as shown below.

2018 RMD

$500,000/26.5 = $18,867.92

$200,000/26.5 = $7,547.14

How do I take it?

Stan would be required to take a total of $26,415.09 ($18,867.92 + $7,547.14) from his accounts by April 1st, 2019. He is only required to take the total, it does not matter which account(s) he takes it from and in what proportions.  He could take the amounts listed from each account or he could take all from one and none from the other.  As long as he takes the total by the deadline the IRS mandate is satisfied.

As discussed above, this first distribution is for 2018 and he has until April 1st, 2019 to take it.  After the first distribution, he is required to take an annual distribution by December 31st every year after, including December 31st, 2019.  Note that he will recalculate the RMD amount each year using the same method discussed above.

Taking two RMDs in a single tax year could have the effect of some income being subject to a higher marginal tax rate, reduced deductions or a change in the treatment of capital gains, qualified dividends and social security.  Taking that first distribution by December 31st, 2018, would have helped him avoid these pitfalls but would have increased his income in 2018, possibly causing their own pitfalls.  Speak to a trusted advisor regarding your situation to make sure you are making the best decision for you.

It is the responsibility of your custodian to calculate and report the RMD to you each year, but it is your responsibility to make sure that it is met.  Also, it is the account holder’s responsibility to verify that the amount given to them by their custodian is correct, so make sure to use the above-mentioned table to verify your RMD.  If you fail to take your RMD or any part of the RMD in a given year, you will be subject to a penalty on the undistributed amount of 50%.

Example:

Stan has an RMD of $26,415.09 for 2018 but has been busy with distractions this year.  He knows the amount but forgets to take the distribution by the April 1st, 2019 deadline.  He is now required to take the full RMD of $26,415.09 but he is also subject to an IRS penalty of $13,207.55 (50% x RMD).

The penalty will be taxable income to Stan which may affect the taxation of other income sources or could bump him to a higher tax bracket.  This is an easy mistake to make but a very expensive one.

What can I do with the money?

Once you have paid tax on the distribution you are free to spend it, save it or reinvest it in another, non-IRA account.  The point of the IRS requirement is not to have you spend the money, it is to have you pay tax on the money.

If you are charitably inclined, the IRS does allow your RMD (or a portion of your RMD) to be directed to charities of your choice.  If you distribute the funds directly to the charities through your custodian this amount will not be included in your taxable income but will satisfy your RMD for that year.  This is known as a Qualified Charitable distribution (QCD).  Be sure to speak to an advisor regarding this strategy as there are certain limitations that may affect the deductibility of the donation.

The RMD rules can be confusing with one account but, if you have more than one account or you are still with an employer where you have a 401(k), they can become downright overwhelming.  Be sure to give yourself enough time before your deadline to understand your situation so that you can satisfy your requirement and avoid a costly penalty.

*Stan’s example is for educational purposes only. Each individual situation is unique. The piece should not be seen as a recommendation.