SIMPLE IRAs are often mentioned when talking to clients. They either have one with a previous employer or want to know if they would benefit from opening one themselves. SIMPLE IRAs have unique characteristics and rules. Educating yourself on these rules will give you a better understanding of what a SIMPLE IRA is and who it is for.
What is a SIMPLE IRA?
A SIMPLE IRA is a low-cost plan for self-employed or small business owners that is low-cost and easy to maintain.
Who is it for?
SIMPLE IRAs are for self-employed individuals or businesses with 100 or fewer employees. A caveat is that it must be the only retirement plan you fund. If you already have an existing employee retirement fund, you are not eligible to establish a SIMPLE IRA.
Who is eligible?
All employees who have received at least $5,000 in compensation in any of the two prior years or are expected to receive (at least) $5,000 in the current calendar year.
Side Note: You can impose or eliminate less restrictive eligibility requirements for prior year compensation.
How is it funded?
SIMPLE IRAs are funded with salary-deducted contributions and annual employer contributions. Eligible employees can decide whether to contribute/participate, but employer contributions are mandatory.
Contribution Limits (2024)
Eligible employees may contribute 100% of their compensation or a maximum of $16,000. If they are 50 or older, that amount is increased to $19,500.
Administering Information
SIMPLE IRAs must be established by October 1st if you will make contributions for that same year. Annual employer contributions must be made by the employer’s tax filing deadline. In addition, plan vesting is immediate, and employer contributions are tax-deductible.
Early Withdrawal Penalties
Withdrawing from your SIMPLE IRA will result in income tax paid. However, additional penalties may be paid depending on your age and time in the plan.
If you withdraw any amount before age 59 ½, you will be charged an additional tax of 10%. This tax increases to 25% if you withdraw within 2 years of first starting to participate in the plan.
Are they right for you?
SIMPLE IRAs have more intricacies than the ones listed, but hopefully, the broad overview of SIMPLE IRAs has helped you understand their purpose and function better. If you think you or your business would benefit from setting up a SIMPLE IRA, reach out to your advisor. If you don’t have an advisor, Whitaker-Myers Wealth Managers has a team of financial advisors with the heart of a teacher able to help explain and answer questions you may have. Schedule a meeting with one, as they can assess your situation personally.
A Breakdown of SIMPLE IRAs
June 24, 2024
Clay Reynolds
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