SIMPLE IRA

What does SIMPLE IRA stand for?

               SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. Created under the Small Business Job Protection Act of 1996, the SIMPLE IRA became effective on January 1, 1997 and was designed to provide small employers with a streamlined, tax-advantaged retirement plan option.

How does a SIMPLE IRA work?

            SIMPLE IRAs are employer-sponsored retirement plans designed for small businesses and their employees. Employers are generally required to make either matching contributions or nonelective contributions on behalf of eligible employees. Contributions are then invested according to the investment options available through the SIMPLE IRA provider.

            Like traditional IRAs, distributions taken before age 59½ may be subject to ordinary income taxes and an additional 10% federal tax penalty unless an exception applies. In addition, withdrawals made within the first two years of participation in a SIMPLE IRA may be subject to a 25% additional tax.

            SIMPLE IRAs offer several potential tax advantages. Employees may generally make salary-deferral contributions on a pre-tax basis, which can reduce current taxable income. In addition, employer contributions are generally tax-deductible as a business expense.

Are SIMPLE IRA contributions tax deductible?

              One of the key benefits of a SIMPLE IRA is that employees can make contributions on a pre-tax basis. Generally, these contributions reduce current federal taxable income, which may lower an employee's current-year tax liability. Assets in the account grow on a tax-deferred basis, meaning taxes are generally not due on earnings as they accumulate. When funds are withdrawn from a traditional SIMPLE IRA, distributions are generally subject to ordinary income tax. Withdrawals taken before age 59½ may also be subject to an additional federal tax penalty unless an exception applies.

               Employers are generally required to make either matching or nonelective contributions on behalf of eligible employees. In addition, employer contributions are generally tax-deductible as a business expense. These features can make a SIMPLE IRA an attractive retirement plan option for many small businesses and their employees.

Can a SIMPLE IRA be Roth?

               The SECURE 2.0 Act introduced the ability for SIMPLE IRAs to offer Roth contribution features, subject to applicable rules and provider availability. Roth contributions are made with after-tax dollars and generally do not reduce your current taxable income. The potential benefit of a Roth account is that qualified distributions, including earnings, may be received income tax-free if certain requirements are met, generally including attainment of age 59½ and satisfaction of the applicable five-year holding period.

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

           Yes, in certain circumstances, assets held in a SIMPLE IRA may be rolled over to another eligible retirement plan, such as a 401(k). However, there are several important factors to consider before making a rollover decision.

          An important consideration is the SIMPLE IRA's two-year participation period. Generally, if less than two years have passed since you first participated in the SIMPLE IRA, rollover options may be limited. A rollover that does not comply with applicable IRS rules could result in income taxes and may be subject to an additional 25% early distribution penalty.

            Before initiating a rollover, it is important to evaluate factors such as investment options, fees and expenses, services, withdrawal provisions, and tax considerations. Retirement Wealth Partners can help you understand the available options and considerations associated with a potential rollover. 

Important Rollover Considerations: Before rolling assets from a SIMPLE IRA to another retirement account, investors should carefully consider all available options. Factors such as fees and expenses, available investment options, services, distribution options, creditor protections, and tax treatment may vary among retirement accounts. A rollover may not be appropriate for every investor. Consult your tax advisor and carefully evaluate your individual circumstances before making a rollover decision.

When is the SIMPLE IRA Contribution Deadline?

               Employer contributions to a SIMPLE IRA generally must be made by the employer's tax-filing deadline, including extensions. For many employers, this means April 15, or October 15 if an extension has been properly filed. Because filing deadlines may vary, employers should consult their tax professional regarding their specific contribution deadline.

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 generally available only to businesses with 100 or fewer employees that satisfy applicable eligibility requirements. Compared with a 401(k) plan, a SIMPLE IRA may offer fewer customization options regarding plan design and employer contribution arrangements. However, it is often simpler to administer and may involve lower administrative costs than some 401(k) plans.

           Potential advantages of a 401(k) plan include higher annual contribution limits, the ability to offer participant loans if permitted by the plan, and potential eligibility for certain retirement plan tax credits available under current law. 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.