A SIMPLE IRA, or savings incentive match plan for employees, is a small-business retirement plan employers can offer their employees. A SIMPLE IRA can be a good alternative to a 401(k) or other types of retirement plans because there generally is less paperwork and fewer procedures to follow with a SIMPLE IRA. A SIMPLE IRA can be a solid option for many small businesses that otherwise might not be able to offer their employees a retirement plan because of the cost and administrative burden.
In order to offer the SIMPLE IRA, the employer must have 100 or fewer employees and must offer one of two contribution matching options. Employees are always 100% vested in the employer’s contributions to the plan.
The employer can choose a custodian for the plan (places like Fidelity, Schwab, Vanguard or others where the investments are housed), or it can allow the participants to choose their own custodian for their account.
Here are a few more details on SIMPLE IRAs and the contribution limits for 2019.
Types of SIMPLE IRA contributions
There are two types of contributions — employee contributions and employer contributions.
Employee contributions typically would be made via salary reduction, much like a 401(k) plan. Every pay period, the employer would defer the amount elected by the employee and deposit it into their SIMPLE IRA account.
A SIMPLE IRA plan also can be used by self-employed individuals, including sole proprietors who might not generate a regular payroll. Their contributions would be based on their net earnings from self-employment, which can be found on the Schedule C form on their tax return.
Employer contributions are made via a mandatory matching contribution. Employers have two contribution options:
- They can make a matching contribution of up to 3% of the employee’s compensation with no annual compensation limits (like some other types of retirement plans). In order to receive this match, the employee must contribute to the plan. There is some flexibility in this contribution. For example, if an employer experiences a financial hardship, it can lower the matching contribution to 1% or 2% for up to two years of a rolling five-year period.
- They can make a 2% nonelective contribution for all employees. This contribution is made regardless of whether the employee chooses to contribute to the plan and regardless of the amount they choose to contribute.
Contribution limits for 2019
The contribution limits for 2019 have been increased to $13,000, up from $12,500 for 2018. Additionally, those who will be age 50 or over at any point during the calendar year can contribute an additional $3,000 from their salary in catch-up contributions.
Unlike some types of employer-sponsored retirement plans, there are no caps on employee contributions for SIMPLE IRAs. You are allowed to contribute up to 100% of your compensation, up to the $13,000 limit (plus $3,000 if you are at least 50 years old).
A SIMPLE IRA also might be a good option for self-employed individuals with less than $100,000 in income. Plans like SEP (simplified employee pension) IRAs and solo 401(k)s have higher maximum contribution limits, but your income needs to be higher in order to take full advantage of them.
Timing of contributions
Contributions typically will be made every pay period if you are an employee of the company. Employee salary reduction contributions must be deposited into the employee’s account no later than 30 days after the end of the month in which the compensation tied to the contributions was paid.
For those who are self-employed, you must make your employee contributions no later than 30 days after the end of the year, which would fall on Jan. 30.
Employer matching and nonelective contributions must be deposited with the custodian maintaining the account no later than the date that the business files its tax return for that year, including extensions.
Options when leaving an employer
As previously mentioned, any money contributed to a SIMPLE IRA by you or on your behalf is 100% vested right away. This means all contributions are yours to take with you when you leave your employer.
However, there is one key provision to be aware of: There is a 25% penalty if you leave the employer within two years of your initial participation in the plan and withdraw the money before the age of 59 and a half. This rule doesn’t apply after the age of 59 and a half. During the two-year period, transfers to another SIMPLE IRA plan will not be assessed this penalty.
After this two-year period, you can roll the money into another IRA or any other type of retirement plan as you see fit.
The bottom line
A SIMPLE IRA is a great way for smaller employers to offer their employees a solid retirement savings vehicle. It is incumbent on you, as a participant in a SIMPLE IRA plan, to understand your contribution limits and how the company match works.