A SIMPLE IRA stands for Savings Incentive Match Plan for Employees, it’s a type of retirement account for small businesses, and for people who are self-employed. It works like a Traditional IRA, where your contributions grow tax-deferred. When it comes time for retirement, your distributions are taxed as normal income.
SEP IRA vs. SIMPLE IRA
While SEP IRAs and SIMPLE IRAs get mixed up sometimes, they’re actually pretty different. SEP IRAs don’t allow the employee to make the contributions, the employer does. A SIMPLE IRA gives the employee more power over their IRA.
Why a SIMPLE IRA
What makes a SIMPLE IRA unique is that employers are required to make a contribution on the employee’s behalf. The employers are required to contribute a dollar-to-dollar match of up to 3% of salary or a flat 2% of pay, regardless of whether the employee continues to contribute to the account.
For an employer to open the IRA, they must have 100 or fewer employees. Those employees must also earn more than $5,000 each. That includes all employees who have worked at any point in a calendar year. The employer also cannot open or have any other retirement plan other than the SIMPLE IRA.
If your employer offers a SIMPLE IRA, you qualify to contribute if you earned at least $5,000 a year during any two years before the plan was set up, and if you expect to earn at least $5,000 this year.
The employer can lower the matching contribution to 1% or 2% of total compensation. But only in any two out of five years that the plan is in effect. In the other three years, the company must make either a 3% match or the 2% flat contribution.
All-in-all, whether you’re a business owner seeking a retirement plan for your employees, or if you’re a freelance employee, this IRA plan might be the answer to your retirement needs.