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What Is a SIMPLE IRA and How Does It Work? Everything You Need to Know

A Savings Investment Match Plan for Employees (SIMPLE IRA) is a straightforward and affordable retirement solution for self-employed people and small enterprises with a maximum of 100 staff members. By making monthly income deferrals and additional contributions from the company, eligible employees can finance their own SIMPLE IRA accounts.

If you are curious about this type of savings plan, keep reading! In this article, we’ll help you decide whether this type of employer-sponsored retirement plan is as beneficial for retirement savings as it seems.


Simple IRA

SIMPLE IRA is short for Savings Incentive Match Plan or Savings Investment Match Plan for Employees (SIMPLE) individual retirement account (IRA). It is an investment plan that allows employees in small businesses with 100 or fewer employees to save for their retirement.

They can contribute toward this investment plan with a salary reduction. In addition to employee contributions, employer contributions also contribute to this type of savings plan.

How Does a SIMPLE IRA Work?

SIMPLE IRAs are similar to traditional IRAs and are much simpler to set up than 401(k) investments. However, the employee contribution limitations for SIMPLE IRAs are lower than for 401(k)s.

Because a SIMPLE IRA plan is simpler to set up and manage than a 401(k), smaller companies may offer it to employees instead of a 401(k). Self-employed individuals are also encouraged to use this plan, and they could have better retirement account alternatives.

How Does a SIMPLE IRA Compare to Other Types of Retirement Investments?

Many of the investing, payout, and rollover requirements that apply to other retirement plan types also apply to SIMPLE IRAs. The fact that employer contributions to SIMPLE IRAs are required may be its most significant disadvantage. Moreover, the company match could be popular with staff, but the reduced contribution limits compared to 401(k)s and the absence of a Roth option may not be.

The Benefits of Setting Up This Kind of Employer-sponsored Retirement Plan

Retirement Investment Plan

Before deciding whether a SIMPLE IRA is the best choice for you or your company, it would help to take a look at some of the benefits of setting up this retirement savings plan.

Employer Contributions Make This a Worthwhile Investment Opportunity

As mentioned in the previous section, companies are required to make SIMPLE IRA contributions. Although some companies may view that rule as a barrier, employees may view it as a benefit of SIMPLE plans.

There Aren’t Any Stringent Rules for Eligibility

In general, if you intend to earn a minimum of $5,000 in remuneration during the calendar year of enrollment and have received a minimum of $5,000 in income during the prior two calendar years, you are qualified to join a SIMPLE IRA. However, the IRS also permits businesses to provide these accounts to workers who don’t meet these eligibility requirements.

No Salary Reduction Is Necessary

If your firm opts for the non-elective two percent contribution option, employees don’t need to enroll for income deferrals to receive the employer contribution. You must make a contribution in order to receive the match if your plan uses the optional salary reduction/matching approach.

No Vesting Time and Tax Benefits

The contributions from employers become vested right away. You are the sole owner of all the funds in these retirement plans, and there is no vesting time. Moreover, you will only have to pay income taxes upon withdrawal, which can provide tax benefits.

You’ll Have More Investment Options with a SIMPLE IRA

There are typically more investment options available than there are for 401(k)s. You can invest in mutual funds, bonds, stocks, and any other investment vehicles that the IRA provider offers, as opposed to being restricted to the mutual funds that the administrator of the 401(k) plan selects.

You’re Not Restricted to a Savings Incentive Match Plan

The IRS permits individuals to make simultaneous contributions to multiple retirement savings programs. That’s useful if, for instance, you wish to contribute to a regular or Roth IRA in addition to your retirement account at more than one employment.

The Drawbacks of Setting Up a SIMPLE IRA

While there are many benefits to setting up simple IRA plans, there are a few drawbacks that could deter an eligible employee from choosing this type of plan.

  • There are lower contribution limits than other types of retirement accounts.

  • You cannot dip into your SIMPLE IRA savings because early withdrawals are not permitted.

  • Strict rules are in place when rolling over your funds from a SIMPLE IRA to another fund.

Three Steps to Set up a SIMPLE IRA Plan

Have you decided this is the right option for you or your business? In that case, you’ll need to follow these steps to establish a SIMPLE IRA:

1. Fill Out the Right SIMPLE IRA Form

Eligible employees will need to fill out one of the following documents to set up these retirement plans:

  • IRS Form 5304-SIMPLE – Used if staff members are allowed to choose their own financial institution for the retirement account.

  • IRS Form 5305-SIMPLE – This is used when depositing SIMPLE IRA contributions at a designated financial institution.

2. Let the Eligible Employees Know

Those who qualify for these employer-sponsored retirement plans should be informed that they qualify for the SIMPLE IRA program.

3. Set Up the Accounts

Next, the company will need to fill out either Form 5305-S or Form 5305-SA for every staff member. Once that has been done, employees can receive matching contributions to the SIMPLE IRA plan and save for their retirement!

The Bottom Line

SIMPLE IRAs are great options for those who are self-employed or working for a small company. Although the contribution limits are lower than other retirement savings plans, it still provides a number of benefits.

If you are an employee wondering whether you should create an account or not, we highly recommend setting one up. Otherwise, you’re losing out on free money that can be used when you are no longer able to work!

Want to know about other retirement options? Please browse our website for more about different investment types!