What Is a SIMPLE IRA?
SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts, and is employer-sponsored. This means it is offered to employees through a business. These types of retirement plans are made specifically for small businesses with 100 or fewer employees. They are a cost-effective way for small businesses to offer a retirement plan. This is mainly because they don’t require the startup costs or ongoing expenses of a traditional retirement plan, like a 401(k). The employer cannot offer any other retirement plan to qualify for this retirement savings account. To gain eligibility for a SIMPLE IRA, an employee must meet one of two requirements: They have earned at least $5,000 from their employer in any two prior calendar years (it doesn’t have to be consecutive). They expect to earn $5,000 over the current calendar year.
Employees make SIMPLE IRA contributions via salary withholding. The annual contribution limit for this plan in 2022 is $14,000, and this is up from the $13,500 limit that was in place in 2021 and 2020. However, those older than 50 years of age are eligible to make catch-up contributions of up to $6,500 a year.
The employer must contribute to a SIMPLE IRA annually. There are two options. An employer can either make a non-elective 2% contribution for every employee; or match up to 3% of an employee’s contributions on a dollar-for-dollar basis. In the former case, even employees who don’t contribute to their SIMPLE IRA will still get their employer’s 2% annual contribution. The IRS caps this at $305,000 (up from $290,000 in 2021). Another thing to keep in mind when it comes to SIMPLE IRAs is that employees are always 100% vested. This means that they own all the funds in their SIMPLE IRA account. This differs from 401(k)s, which often have vesting schedules which restrict access to matching funds until a period of time has elapsed.
What is A SIMPLE 401(k)?
A SIMPLE 401(k) is another tax-advantaged savings vehicle that allows small business employees to save for retirement. These also provide access to employer matching, which can be beneficial over the long term. As with SIMPLE IRA plans, an employer must match an employee’s contributions up to 3%, or make a non-elective, flat 2% contribution of each eligible employee’s pay. Like SIMPLE IRAs, SIMPLE 401(k) plans are only available for employers with 100 or fewer employees. Employers offering SIMPLE 401(k)s are also granted a two-year grace period in the event their company surpasses 100 employees. Similar to their IRA counterpart, the 2022 contribution limit for SIMPLE 401(k) plans is $20,500. Again, a $6,500 catch-up limit is available for anyone 50 and over. Withdrawals before age 59.5 are subject to a 10% early distribution penalty. Employees are fully vested in all SIMPLE 401(k) contributions. Remember, this means they own all funds in their SIMPLE 401(k) rather than waiting a designated amount of time to become vested. A company cannot offer other retirement plans in addition to a SIMPLE 401(k).
SIMPLE IRA vs. SIMPLE 401(k):
Key Differences: A SIMPLE 401(k) offers optional loans and hardship withdrawals. This level of flexibility is impressive, as this type of plan doesn’t place employees’ funds too far out of reach. Despite not having a formal loan option like SIMPLE 401(k)s do, you can still withdraw from your SIMPLE IRA as you please. Just know that doing so before age 59.5 will likely incur a 10% or 25% early withdrawal tax penalty. Filing requirements for a SIMPLE IRA are nominal for plan administrators. A SIMPLE 401(k) requires the annual filing of Form 5500. This extra work could be a lot to handle, especially for very small businesses. Although an employer cannot offer other plans to employees who qualify for the SIMPLE 401(k), they can provide an additional plan to those employees who fall outside the qualification guidelines. Employers using a SIMPLE IRA plan cannot do this, which could leave some employees on the outside. There is no minimum age for a SIMPLE IRA. Conversely, SIMPLE 401(k)s can require participants to be 21 years or older, plus have at least one year of service time.
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