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What is a SIMPLE IRA and Who’s Eligible to Open One?

The SIMPLE in SIMPLE IRA stands for “Savings Incentive Match Plan for Employees.” This retirement savings plan is a type of traditional IRA that is geared towards self-proprietors and small business owners.

Unlike SEP IRAs, where only the employer can make contributions, employees are allowed to contribute part of their pre-tax compensation to their SIMPLE IRA. Individual employees are able to make “salary reduction contributions” or “elective deferral contributions” of up to $13,000 in 2019.

Next is where the “incentive match” part comes into play. With SIMPLE IRAs, employers are required to contribute on the employee’s behalf, whether or not the employee contributes. Employer contributions may match the employee’s contribution dollar-for-dollar, up to 3% of their salary. Or, employers can contribute a fixed 2% in a “non-elective contribution.” Note that 3% is the maximum an employer has to match, and employers can choose to reduce the matching amount to 1% for 2 years in a 5-year period. However, if an employer chooses to do this, they have to match the full 3% for the other 3 years.

Eligibility

To be eligible for a SIMPLE IRA, employers must have 100 or fewer employees that earned more than $5,000 during the previous calendar year. Employers cannot exceed the 100-employee limit while maintaining the SIMPLE IRA. Once they surpass that number, employers may maintain the SIMPLE IRA for two years (after the year they exceeded it), but after this period, they are no longer eligible.

As an employee, you qualify to contribute if you earned at least $5,000 during any two years before the plan was set up and “reasonably expect” to receive at least $5,000 during the current year. Unlike some 401K plans, employer contributions to SIMPLE IRA plans are 100% vested whenever they are deposited into the account.

The second stipulation of SIMPLE IRAs is that employers cannot participate in any other plans, such as SEP IRAs, 401K plans, qualified annuity plans, employee-funded pension trusts, and so on.

Advantages

Many self-employed individuals meet both stipulations, and SIMPLE IRAs are great options for self-proprietors or small business owners that have yet to set up a work-related retirement plan. Like SEP IRAs, SIMPLE IRAs are easy to set up and administer, not to mention affordable. Your financial institution will take care of most of the details and all contributions are deposited directly into IRAs, making them “simple” to operate. And of course, all contributions are tax-deductible.

Another advantage of SIMPLE IRAs is they make it easier to add full-time employees, which can be more challenging with SEP IRAs. If you are self-employed but considering hiring employees, then a SIMPLE IRA is likely a better option for your situation. This plan will make it easier for your business to grow.

In sum, most sole-proprietors and small business owners are eligible for a SIMPLE IRA, assuming they have fewer than 100 employees and are not maintaining another retirement savings plan. These plans reflect their name in their simplicity to set up and administer. This combined with low costs and fees make SIMPLE IRAs an appealing option for the self-employed. If you have your sights set on growing your business, and do not need to save a significant amount of money quickly, SIMPLE IRAs may be the best option for you.

2 thoughts on “What is a SIMPLE IRA and Who’s Eligible to Open One?

  1. Being 19 years old right now, I consider starting up an IRA early this year one of the smartest things I’ve done. 🙂Nice post keeps posting this type of blog.

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