If you are looking to open a retirement account, you may be considering a SIMPLE IRA. To help you determine whether a SIMPLE IRA is right for you, we cover what it is, how it works, who may want to use it, why you may want to use it and how you can open this type of IRA.
What Is a SIMPLE IRA and How Does It Work?
Also known as a Savings Incentive Match Plan for Employees individual retirement account (IRA) plan, a SIMPLE IRA allows both employees and their employers to contribute to a standard IRA set up specifically for employees. These employer-sponsored plans are ideal for employees who want to start saving for retirement, as long as they’re employed by a smaller employer with fewer than 100 employees.
Simple IRA vs. Roth IRA
While both SIMPLE IRAs and Roth IRAs are retirement accounts, they have some key differences. A SIMPLE IRA is specifically for employees at small employers, while Roth IRAs can be opened by any individual who is eligible and is not limited to employees. Contributions to a Roth IRA are taxable, but your money grows tax-deferred, and distributions are tax-free.
Simple IRA vs. Traditional IRA
As with a Roth IRA, there are a few differences between a SIMPLE IRA and a conventional IRA. Employers don’t sponsor conventional IRAs. Instead, individuals open standard IRAs. Both types of IRAs are tax-deferred and offer tax-deductible contributions, though the tax-deductible contributions for a SIMPLE IRA apply only to sole proprietors and employers.
Who Uses SIMPLE IRAs?
Employees who receive a minimum of $5,000 in wages in two years and are expected to earn a minimum of $5,000 in the current year may qualify to participate in a SIMPLE IRA. As an employee with a SIMPLE IRA, you own 100% of the funds in your account.
Why Use a SIMPLE IRA
SIMPLE IRAs can be advantageous for both employers and employees. The benefits of using a SIMPLE IRA as an employee include the following:
- Vested contributions: Employer contributions to your SIMPLE IRA vest immediately. Since there is no vesting period, you completely own all of the funds in your account.
- Employer contributions: Your employer must contribute to your SIMPLE IRA, which is essentially free money for you.
- Low eligibility requirements: Requirements for qualifying for a SIMPLE IRA are low. The amount you need to earn to be eligible is low. The IRS even allows employers to offer SIMPLE IRAs to some employees who don’t meet the requirements.
- Various investment choices: SIMPLE IRA plans tend to offer more investment choices than 401(k)s. You can choose to invest in mutual funds, stocks, bonds and other investment options offered by the SIMPLE IRA provider.
- Contributions to other retirement plans permitted: Another benefit to a SIMPLE IRA is that you can also contribute to other retirement savings accounts. If you have multiple jobs that offer employer-sponsored retirement plans or you still want to contribute to a Roth or conventional IRA, you can contribute to those accounts at the same time.
For employers, one of the reasons a SIMPLE IRA plan is appealing is the minimal paperwork requirements. The paperwork includes annual disclosures to employees and an initial plan document. Startup and maintenance costs are also low, and employers may receive a tax deduction for contributions.
How to Open a SIMPLE IRA
Employers can establish a SIMPLE IRA with Accuplan. Follow the steps below to open a SIMPLE IRA:
- Open an account with us at Accuplan.
- File IRS Form 5305-SIMPLE to select the type of plan you want to use.
- Provide eligible employees with information regarding the plan.
- Use Form 5305-SA or Form 5305-S to set up SIMPLE IRAs for every eligible employee.
Contact Us at Accuplan
At Accuplan, we provide self-directed IRA administration. With our dedicated experts and intuitive dashboard, you can invest confidently. Contact us at Accuplan to learn more about whether a SIMPLE IRA is right for you, or fill out a form to onboard with us today.
*Our information shouldn’t be relied upon for investment advice, but this is simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice. We make no guarantees.