SIMPLE IRA

What does SIMPLE IRA stand for?

              SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account.  This savings vehicle was established under the Small business Job Protection Act of 1996 and became effective on January 1, 1997

How does a SIMPLE IRA work?

            SIMPLE IRAs are a sponsored benefit by an employer for its employees.  Employers must contribute into their employee’s accounts as either a matching contribution or non-elective contributions.  These contributions are than invested in different investment options for retirement.  Like a traditional IRA or 401(k), withdrawing the funds may include a 10% tax penalty if the employee is younger than 59 ½. There are several tax advantages associated with offering a SIMPLE IRA.  First, the employees can contribute on a pre-tax or Roth basis for retirement.  Second, the employer contributions are tax-deductible as a business expense.

Are SIMPLE IRA contributions tax deductible?

              One of the great benefits of a SIMPLE IRA is that employees can make contributions on a pre-tax basis.  What does this mean?  It means that when you contribute to your SIMPLE IRA on a pre-tax or traditional basis, you do not have to pay state or federal income taxes.  This makes your contribution tax deductible as it reduces your tax liability for the current year.  The funds grow on a tax deferred basis, which means that you will have to pay income tax when the funds are withdrawn in retirement after you turn 59 and ½ years old.

              The same is true for the employer match.  If the match is contributed on a pre-tax basis, they do not have to pay Medicare or social security tax on the match.  These tax advantages are a great reason to offer this plan for your employees.

Can a SIMPLE IRA be Roth?

              With the establishment of SECURE 2.0, you can now contribute on a Roth basis into your SIMPLE IRA. This means that your contribution is not tax deductible for your current year.  The benefit of a Roth account is that after you pay federal and state income taxes, withdrawals from this account can be tax free if you are over 59 and ½, retired, and had the account at least 5 years.

Can a SIMPLE IRA be Rolled into a 401(k)

           Yes, you can, but there are things to consider before you make the decision. If you are transitioning jobs and looking to consolidate your SIMPLE IRA with your new 401(k) plan, there are several considerations that Retirement Wealth Partners can help you with. 

           The biggest consideration is if you have had your SIMPLE IRA for over two years.  If you have not had the SIMPLE IRA for two years but you still roll the funds into a 401(k) plan, you will be subject to income tax and possibly a 25% withdrawal penalty. 

When is the SIMPLE IRA Contribution Deadline?

              The employer contribution must be deposited into the employee’s account by the employer’s tax-filing, including extensions.  This means that they must contribute the funds by April 15th without an extension or by October 15th with an extension.

Who gets my SIMPLE IRA Account if i die? 

                This is a hard question as it can be difficult to think about your own mortality.  However, it is an important topic that is often overlooked.  You can add a primary and contingent beneficiary onto your SIMPLE IRA to reduce any unintended consequences.  When you invest in a beneficiary-named financial account, such as a SIMPLE IRA, you should name the individuals or institutions you want to receive the assets in the account when you die.

               These are designated as your primary beneficiaries. A contingent beneficiary is someone or something that receives the benefits of an account if the primary beneficiary can't or won't do so after the account owner's death. Contingent beneficiaries stand in the wings, next in line to inherit assets if something should go wrong. Think of them as a backup plan.

Things to know when designating your SIMPLE IRA Beneficiary:

• Don’t leave the beneficiary form blank! Failing to name a beneficiary is a big mistake because doing so could deprive your heirs or loved ones of inheriting your retirement assets. Another downside is that your retirement assets would go through probate, which is basically the legal process of proving a will, a lengthy, and possibly costly, process which will delay your assets being distributed.
• Don’t designate your estate as the beneficiary. Although it can be, your estate should never be the named beneficiary of a SIMPLE IRA. To do that, either on purpose or simply by failing to name a beneficiary, means the SIMPLE IRA money will be disposed of by probate court, which may also delay the distribution for your heirs for months or even years.
• Beneficiary designations take precedence over wills. Retirement assets are distributed according to the named beneficiary, regardless of other agreements such as wills. So don’t assume if you have a will, that your wishes will be carried out if they don’t jive with the beneficiary form on your SIMPLE IRA accounts.
• Keep your beneficiary designations current. Many people fail to update their beneficiary designations after major life events, such as: marriage, divorce, new additions to the family, relationship changes, death to a named beneficiary

Lastly, consult an expert if you aren’t sure who to name as your beneficiary. Experts would include an estate attorney or a tax professional.

Should I Start a SIMPLE IRA or a 401(k)?

           As an employer looking to increase benefits for their employees, both a SIMPLE IRA and a 401(k) offer a tax advantaged way to save for retirement.  The question is, which one is right for you?

            A SIMPLE IRA is only eligible for small business with 100 or fewer employees.  A SIMPLE IRA provides less flexibility in terms of eligibility and employer contribution options but can be cheaper to the employer than offering a 401(k).  Additionally, there is less of an administrative burden associated with a SIMPLE IRA. 

            Benefits of a 401(k) include tax credits from the SECURE 2.0 Act, ability to offer loans within the plan, and higher annual contribution amounts.

If you are an employer and have questions about which plan is right for you, give Retirement Wealth Partners a call and we can discuss some of the important factors before making your decision.

Where can I set up a SIMPLE IRA?

          You can set up a SIMPLE IRA with Retirement Wealth Partners.  We have decades of experience establishing and managing SIMPLE IRAs for various employers.  It’s important to find a competent partner when offering this benefit to your team as mistakes are not only costly, but affects those that impact your business.