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Simple IRA

What is a SIMPLE IRA?

The SIMPLE IRA is an employer sponsored retirement plan available to small businesses with less than 100 employees including sole proprietorships, partnerships, S corporations and C corporations.

SIMPLE IRA's consist of 2 parts: an optional employee salary deferral and a mandatory employer match. SIMPLE IRA's are easy to administer and IRS filings are not required. SIMPLE IRAs must be established by October 1st in order to contribute to a plan for the current year.

Employee Contributions

With a SIMPLE IRA, eligible employees can elect to contribute by salary deferral (like a 401k plan). In 2015 employees can elect to defer up to 100% of their income up to a maximum of $12,500 or $15,500 for those age 50 or older. SIMPLE IRA participants age 50 or older are permitted to make an additional $3,000 catch-up contribution. In general, contributions made by an employee are 100% tax deductible and investment earnings grow tax deferred and can be withdrawn after age 59 ½. Withdrawals prior to age 59 ½ are likely to incur taxes as well as IRS penalties for premature withdrawal.

Employer Contributions

Employers must make mandatory contributions into a SIMPLE IRA on behalf of their eligible employees and into their own SIMPLE IRA account. In general, employer SIMPLE IRA contributions made into these accounts are 100% tax deductible. Contributions must be made annually by the employer's tax filing deadline (including extensions).

Employer contributions can be made in one of the following ways:

  1. A 3% employer match is made only for those employees electing to defer a portion of their salary. Employers match employee salary deferrals dollar for dollar up to 3% of employee compensation. An employer can reduce the employer's match to 1% of each participating employee's compensation for any two years in a five year period.
  2. A 2% employer contribution based on an employee’s compensation (up to $5,200 in 2014 and $5,300 in 2015) for all eligible employees regardless of whether the employee is electing to defer a portion of their salary or not.

SIMPLE IRAs are very inexpensive to maintain and their costs vary, but may cost approximately $15-$25 annually per employee account.

Note on the SIMPLE IRA:

Employers who would like to sponsor a retirement plan, but who do not want to make contributions to employees’ accounts may want to consider a 401k. A business owner with employees must weigh the SIMPLE IRA’s benefits of low administrative fees, but the requirement of the employer match versus a 401k which has much higher administrative fees, but does not require an employer match. Contact us if you need clarification.

Are you self employed and have no W-2 employees?

If you are then you should consider an Individual 401k as an alternative to a Simple IRA. Self employed individuals who would like to contribute in excess of the limits of a Simple IRA should consider an Individual 401k since it has higher contribution limits.

Simple IRA

Features:

  • A Simple IRA is easy to set up and has low administrative responsibilities.
  • 2015 Simple IRA contribution limit is $12,500 or $15,500 if age 50+. In addition there is a maximum 3% employer contribution.

Disadvantages:

  • Relatively low maximum annual contribution limits.
  • Loans are not permitted.

What are the advantages of a Simple IRA?

Self employed business owners that have a Simple IRA are able to contribute up to 100% of their income up to the maximum contribution limits of $12,500 or $15,500 if age 50+. As a result, significant contributions can be made into a Simple IRA even at lower income levels. A good candidate for this plan doesn't mind the relatively low maximum contribution limits. Self employed individuals who would like to contribute in excess of the limits of a Simple IRA should consider an Individual 401k since it has higher contribution limits.

Individual 401k

Features:

  • 2015 Individual 401k contribution limit is $53,000 ($59,000 if age 50+ due to a "catch-up" provision).
  • Tax free loans are permitted with an Individual 401k plan. Loans are permitted up to 50% of the total value of the Individual 401k up to a maximum of $50,000.
  • Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into a Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

Disadvantages:

  • Potentially greater administrative responsibilities and administrative fees compared to a Simple IRA.

SIMPLE IRA Calculator

Compare how much could be contributed to a SIMPLE IRA versus an Individual 401k based on your income. Use the SIMPLE IRA Calculator.

IRA Information

Information about IRAs for individual investors and IRAs for the self employed and small businesses. Learn more about the IRA.

 

How Can BCM Help You?

Beacon Capital Management Advisors is experienced in helping individual investors and small businesses save for their retirement and we welcome the opportunity for you to speak to a BCM Advisor to learn more about the SIMPLE IRA services we provide to our clients. BCM is registered in 50 States and is an Accredited Business of the Better Business Bureau since 2004. Complete the form below and a BCM Advisor will promptly respond to your inquiry.

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.