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Understanding a SIMPLE IRA Plan for Employees and Employers

By David S. Chang

What is a SIMPLE IRA?

A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited for small companies with 100 or fewer eligible employees.

SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. Unlike a 401(k), the employer must match up to 3% of an employee’s contribution or make contributions for employees of a flat 2% of salary, whether or not the employee chooses to participate in the plan.


What are the Benefits of a SIMPLE IRA?

  • Tax Savings – The contributions you make are pre-tax from your salary, which can reduce the amount of taxes you pay. In addition, the money in the plan grows tax-free until you withdraw the money. Life other retirement accounts, if the money is withdrawn before age 59 1/2, you will pay a 10% penalty fee as well as the taxes.
  • “Free Money” for Retirement – Your employer (depending on the type of contributions) will also make contributions to your retirement account. Don’t leave the “free money” on the table by not taking advantage of the employer match if they have one!
  • 100% Immediate Vesting – Unlike some other retirement plans where you have to stay a certain time period at the company to “vest” and get to keep the funds, the contributions you and your employer make are yours and available for you to invest.

Investing in a SIMPLE IRA will help you save for retirement and improve your tax situation! This graph below illustrates the advantages in one.

You can potentially make more money in a SIMPLE IRA than a regular taxable savings account. This hypothetical graph shows a 6% return for a SIMPLE IRA plan (tax-deferred) vs a taxable account at a 22% tax rate. The difference is an extra $100,000!

Why is it so Important to Save for Retirement?

According to the Employee Benefit Research Institute, 45% of American Workers have less than $25,000 in total savings and investments. Investing is having your hard-earned money work for you. The longer you wait though, the harder it will be to catch up.

Investing allows you to take advantage of “compound interest” what Albert Einstein called the 8th wonder of the world! Below is an example of the power of compounding. Investing just $100 dollars a month for ten years ($12,000 total) at 8% return can turn into over $200,000!

The best time to invest many have been yesterday, but the next best time to invest is today!

Need more information on getting on track financially? Click here for a 14-Day Plan to get your finances in order!


How does a SIMPLE IRA plan work?

A SIMPLE IRA must be set up by or for each eligible employee and all contributions to the plan must go to it. The company can choose to have each employee select the financial institution for receiving his or her SIMPLE IRA plan contributions or the contributions will go to an employer-designated financial institution.

Their are two employer contribution options:

Option 1: Matching contribution up to 3% of employee compensation.

For option 1, the company will contribute to your SIMPLE IRA a matching contribution equal to your salary reduction contributions. The matching limit is up to a limit of 3% of your compensation for the year. In other words, the employer will match the employees’ contributions dollar-for-dollar up to 3% of each employee’s compensation. The employee can contribute up to the maximum amount if he or she chooses.

Here are some examples to help illustrate Option 1:

Example 1: Employee contributes 5% of her salary to her SIMPLE IRA under Option 1.

Kalani Doe makes $35,000 per year at her company Care for Life. She contributes 5% of her compensation ($1,750) to her SIMPLE IRA. The Care for Life matching contribution is $1,050 (3% of $35,000). Therefore the total contribution to Kalani’s SIMPLE IRA that year is $2,800 (her $1,750 contribution plus Care for Life’s $1,050 contribution).

Example 2: Employee contributes 2% of her salary to her SIMPLE IRA under Option 1.

Malia Doe makes $35,000 per year and contributes 2% of her compensation ($700) to her SIMPLE IRA. The Care for Life matching contribution is also $700 (2% of $35,000) since the match is 2%.* Therefore the total contribution to Malia’s SIMPLE IRA that year is $1,400 (her $700 contribution plus Care for Life’s $700 contribution).

*To take fully advantage of the SIMPLE IRA plan, it is recommended that an employee contribute up to 3% of her salary to take advantage of the company’s matching contributions.

Option 2: 2% “non-elective” contribution for each eligible employee.

For Option 2, the employer will contribute 2% of each eligible employee’s compensation whether or not the employee chooses to contribute. In other words even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee will still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation. The employee can still contribute up to the maximum amount. F

Here are some examples to help illustrate Option 2:

Example 1: Employee does not contribute or participate in the SIMPLE IRA Plan under Option 2.

Micah Doe makes $35,000 per year at his company Care for Life. He does not participate in his company’s SIMPLE IRA plan. The company must still contribute $700 (2% of $35,000). Therefore the total contribution to Micah’s SIMPLE IRA that year is $700.

Example 2: Employee contributes 5% of her salary to her SIMPLE IRA under Option 2.

Mike Doe makes $35,000 per year at his company Care for Life. He contributes 5% of his compensation ($1,750) to his SIMPLE IRA. The Care for Life matching contribution is $700 (2% of $35,000). Therefore the total contribution to Micah’s SIMPLE IRA that year is $2,450 (his $1,750 contribution plus Care for Life’s $700 contribution).

There are pros and cons to each option. The most important thing however is to save and invest no matter what! Your future self will thank you!


What is the Maximum Contribution SIMPLE IRA Plan Limit?

  • The 2019 salary deferral contribution limit for those under age 50: $13,500.
  • The 2019 salary deferral contribution limit for those over age 50: $16,000

Who is Eligible to Participate in a SIMPLE IRA Plan?

The employer can choose to have (a) all employees eligible for the plan at any time, or (b) restrict eligibility to employees who meet the following conditions:

  • are reasonably expected to receive at least $5,000 in compensation the current year and
  • also earned at least $5,000 in compensation the past two years.

Can I Stop, Start, or Change my Contributions at any time?

It’s your decision to make contributions or not. Starting and changing contributions are based on your company’s plan documents. You can stop employee contributions at any time by contacting your employer.


What Are My Options with My SIMPLE IRA Plan?

Through the financial institutions an employee can invest in stocks, bonds, funds, and other investments. If an employee has another work-place retirement account, he can roll it over (combine them) into his current SIMPLE IRA plan.

For the first two years however it can only be from another SIMPLE IRA plan. After the two years, he can roll over any workplace retirement account or IRA into his SIMPLE IRA.

If an employee wishes to take distributions from a SIMPLE IRA, she can do so at any time but will incur a 10% penalty and pay taxes on the amount if under the age of 59 1/2. After that age, the employee can use the funds as needed.

If an employee leaves the company, the employee can rollover the funds into a rollover IRA, into another SIMPLE IRA, or keep it at the financial institution if allowed.

For more information, you can visit irs.gov/retirement to read the latest publications and forms.

David S. Chang

Award-Winning Entrepreneur, Wealth Manager and CEO | Chief Editor, Author, Keynote Speaker, Consultant ArtofThinkingSmart.com | Political Consultant | Army Officer National Guard | Living To Fulfill Needs, Solve Problems, and Live Passionately!

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