SIMPLE IRA

What is a SIMPLE IRA?

The SIMPLE IRA is an employer sponsored retirement plan available to small businesses with less than 100 employees including sole proprietorships, partnerships, S corporations and C corporations.

The SIMPLE IRA consists of 2 parts: an optional employee salary deferral and a mandatory employer match. The SIMPLE IRA is easy to administer and IRS filings are not required. The SIMPLE IRA must be established by October 1st in order to contribute to a plan for the current year.

In 2020 a sole proprietor can elect to defer up to 100% of their income up to a maximum of $13,500 or $16,500 for those age 50 or older. SIMPLE IRA participants age 50 or older are permitted to make an additional $3,000 catch-up contribution. In general, contributions made to a SIMPLE IRA are 100% tax deductible and investment earnings grow tax deferred and can be withdrawn after age 59 ½. Withdrawals prior to age 59 ½ are likely to incur taxes as well as IRS penalties for premature withdrawal.

A sole proprietor must make mandatory contributions into a SIMPLE IRA on behalf of their eligible W-2 employees (if any) and into their own SIMPLE IRA account. In general, employer SIMPLE IRA contributions made into these accounts are 100% tax deductible. Contributions must be made annually by the employer's tax filing deadline (including extensions).

Employer contributions can be made in one of the following ways:

  1. A 3% employer match is made only for those employees electing to defer a portion of their salary. Employers match employee salary deferrals dollar for dollar up to 3% of employee compensation. An employer can reduce the employer's match to 1% of each participating employee's compensation for any two years in a five year period.
  2. A 2% employer contribution based on an employee’s compensation (up to $5,700 in 2020) for all eligible employees regardless of whether the employee is electing to defer a portion of their salary or not.

Are you a sole proprietor and have no W-2 employees?

If you are then you should consider an Individual 401k as an alternative to a SIMPLE IRA. Sole proprietors who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits.

SIMPLE IRA

Features:

  • A SIMPLE IRA is easy to set up and has low administrative responsibilities.
  • 2020 SIMPLE IRA contribution limit is $13,500 or $16,500 if age 50 or older. In addition there is a maximum 3% employer contribution.

Disadvantages:

  • Relatively low maximum annual contribution limits.
  • Loans are not permitted.

What are the advantages of a SIMPLE IRA?

Self employed business owners that have a SIMPLE IRA are able to contribute up to 100% of their income up to the maximum contribution limits of $13,500 or $16,500 if age 50 or older. As a result, significant contributions can be made into a SIMPLE IRA even at lower income levels. A good candidate for this plan doesn't mind the relatively low maximum contribution limits. Sole proprietors who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits.

Individual 401k

Features:

  • 2020 Individual 401k contribution limit is $57,000 ($63,500 if age 50 or older due to a "catch-up" provision).
  • Tax free loans are permitted with an Individual 401k plan. Loans are permitted up to 50% of the total value of the Individual 401k up to a maximum of $50,000.
  • Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into a Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

Disadvantages:

  • Potentially greater administrative responsibilities and administrative fees compared to a SIMPLE IRA.

SIMPLE IRA Calculator

Compare how much could be contributed to a SIMPLE IRA versus an Individual 401k based on your income. Use the SIMPLE IRA Calculator.


Need Help or Advice?

Eric Kuniholm Eric Kuniholm, CPWA®
Certified Private Wealth Advisor®
Beacon Capital Management Advisors
President

If you have questions and need advice contact us. Beacon Capital Management Advisors is registered in all 50 States and is an Accredited Business of the Better Business Bureau since 2004. FINRA’s BrokerCheck.

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