A SIMPLE IRA is an option for small business owners who do not currently have a retirement plan in place but would like to have one. This particular type of retirement plan has several attractive features that deliver significant benefits to both employers and their employees.

What It Is

The Savings Incentive Match Plan for Employees (SIMPLE) is a retirement savings plan targeted at employers with 100 or fewer employees who earn $5,000 or more in compensation. With fewer reporting and administrative requirements than other retirement plans, the SIMPLE plan is designed to appeal to employers with limited resources and personnel to handle benefit administration and compliance issues.

With a SIMPLE IRA, employees may make tax-deferred contributions through payroll deduction to traditional individual retirement accounts set up under the plan. In 2023, the contribution limit is $15,500 ($19,000 if age 50 or over). All account earnings are tax deferred until the plan participant begins withdrawals. Withdrawals from a SIMPLE IRA are taxed at regular income tax rates.

Employers appreciate the fact that a SIMPLE IRA is relatively easy to set up and operate. An annual report is not required, although certain documents must be distributed to inform employees about the plan.

Employers are required to contribute to the plan, either by matching employee contributions up to 3% of pay or by contributing 2% of each eligible employee's compensation. The matching percentage may be lowered in some years.

Plan Benefits

• Employee contributions are tax deferred
• Employer contributions to employees' SIMPLE IRAs are tax deductible
• Account earnings are tax deferred
• No annual filing requirement or discrimination testing

Potential Drawbacks

• Employer contributions are required
• No Roth contributions are permitted
• Full immediate vesting (employee has ownership of all SIMPLE IRA money)
• No loans permitted

Your financial and tax professionals can help you assess your retirement plan options