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SIMPLE IRA

A SIMPLE IRA enables small businesses to have an easy and cost effective retirement savings program while obtaining a federal tax deduction on all contributions.

Overview

Overview

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) is an IRA based retirement savings plan that offers small business owners an easy and cost effective way to assist employees in saving for their retirement as well as their own.

How does a SIMPLE IRA work?

A SIMPLE IRA plan enables eligible employees to save for retirement on a pretax basis. In 2019, employees can make contributions up to $13,000 plus a catch-up contribution of $3,000 for those individuals age 50 and older. In addition, the employer must either make a 100% immediately vested match up to 3% (can be reduced to as little as 1% in any two out of five years) of compensation or 2% non-elective contribution1.  

Tip: The employer may not sponsor another qualified plan (i.e. 401(k)) for a calendar year in which a SIMPLE IRA plan is maintained.

Who should consider a SIMPLE IRA?

  • Business owner who wants to reduce current taxes while saving for retirement
  • Business owner looking for a low-cost retirement savings program
  • Business owner who wants to attract and reward employees by offering an attractive retirement savings option

 

1 A SIMPLE IRA non-elective contribution is an employer contribution to all eligible employees equal to 2% of pay up to the first $265,000 of earnings whether or not the employee makes any payroll investments.

Eligibility

Eligibility

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

Who is eligible to establish a SIMPLE IRA?

An employer with 100 or fewer employees who received at least $5,000 in compensation during the preceding calendar year can establish a SIMPLE IRA.

A SIMPLE IRA can be established by the following entities:

  • Sole-proprietor
  • Self-employed
  • Partnership
  • Limited Liability Corporation (LLC)
  • Non-profits


Who is an eligible employee?

A SIMPLE IRA eligibility includes any employee who satisfies the following criteria:

  • Received at least $5,000 in compensation from the employer during any two prior years and is expected to receive at least $5,000 in compensation during the current year


A SIMPLE IRA may also cover the following employees:

  • Nonresident aliens with U.S. income and
  • Employees covered by a collective bargaining agreement


What is the SIMPLE IRA employee notification requirement?

Prior to the employees' 60-day election period (which generally begins on November 2nd prior to each calendar year), the plan sponsor must provide to each eligible employee:

  • Details concerning the employee's opportunity to make or change a salary reduction;
  • Your decision to make either a matching or non-elective contribution; and
  • Summary description.
 

Contributions

Contributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

How much can be contributed to a SIMPLE IRA?

Employee: A maximum annual pre-tax contribution of $13,000 in 2019 plus an additional $3,000 (2019) for those individuals age 50 and older. 

Employer: An annual required contribution of one of the following: match contribution equal to 3% of employee compensation or a 2% non-elective contribution for all eligible employees. The matching contribution can be reduced to as little as 1% in any two out of five years.

When are contributions required to be made to a SIMPLE IRA?

Employee: Contributions must be made to an employee’s SIMPLE IRA account within 30 days after the end of the month in which the amounts would otherwise have been payable to the employees.

Employer: Contributions must be made no later than the employer’s tax filing date, including extension.

Can an individual contribute to both a SIMPLE and a traditional IRA?

YES. A traditional IRA contribution would be in addition to any SIMPLE IRA contributions, for both employee and employer. In 2019, the traditional IRA contribution limit is $6,000 and $7,000 for those investors age 50 and over.

Practice tip: The same rule and contribution limits apply assuming you qualify to fund a Roth IRA.

Are SIMPLE IRA contributions deductible?

Pretax salary deferrals made to a SIMPLE IRA are deductible to the employee, whereas employer contributions (match or non-elective) are deductible to the employer.
 

Distributions

Distributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What types of distributions can be taken from a SIMPLE IRA?

There are a number of different distributions that can be taken from a SIMPLE IRA. We discuss each distribution type below.

  • Normal
  • Premature (without an exception)
  • Premature (with an exception)
  • Required minimum distribution (RMD)
  • Distribution due to death
     

What is a normal distribution from a SIMPLE IRA?

A normal distribution from a SIMPLE IRA occurs after the account owner attains age 59½. A normal distribution is subject to taxation in the year withdrawn but the 10% (increased to 25% in the first two years of participation) early withdrawal penalty tax does not apply.

What is a premature distribution (without an exception)?

A premature distribution (without an exception) from a SIMPLE IRA occurs upon the account owner withdrawing funds before age 59½ and no exceptions apply. A premature distribution is both taxable and subject to a 10% (25% in the first two years of participation) early withdrawal penalty tax.

What is a premature distribution (with an exception)?

A premature distribution (with an exception) from a SIMPLE IRA occurs upon the account owner withdrawing funds before age 59½ and having the distribution satisfy an exception. A premature distribution (with an exception) is subject to taxation but the 10% (25% in the first two years of participation) early withdrawal penalty tax does not apply.

Common exceptions to the 10% additional tax on early withdrawals are:

  • Substantially equal periodic payments (“72(t)”)
  • Disability
  • Death 
  • Qualified higher education expenses
  • Pay for health insurance premiums after receiving unemployment benefits for more than 12 weeks
  • Unreimbursed medical expenses (greater than 7.5% of adjusted gross income) 
  • First-time home purchase (subject to a lifetime limit of $10,000) 
  • IRS Levy


What is a required minimum distribution (RMD) from a SIMPLE IRA?

A SIMPLE IRA account owner is required to take a minimum distribution the year they turn age 70½ and every year thereafter. The minimum distribution rules permit the initial or first minimum distribution to be deferred until April 1st of the following year. Delaying a required minimum distribution would require the account owner to take two RMDs the following year.

Example:  Jim turns 70½ in 2018. He can either take his RMD in 2018 or delay it until April 1st 2019. Assuming Jim elects to delay his 2018 RMD, he is required to take two RMDs in 2019 (his 2018 deferred RMD and 2019 RMD). All subsequent RMDs must be taken by December 31st

If the full RMD is not taken in a given year, a 50% excess tax is assessed on the amount not taken.

Practice tip: An individual 70½ or older is eligible to participate assuming SIMPLE IRA eligibility requirements have been satisfied. However, the individual must also take minimum distributions.

What is the 60-day withdrawal and rollover rule?

Once in a 12-month period, an IRA account owner may withdraw any amount, for any reason, from any of his/her IRAs and repay the IRA within 60 days without being subject to taxation or an early withdrawal penalty. If the withdrawal is not repaid in the allotted 60-day time frame, the account owner will be subject to potential taxation and penalties.

Recent guidance clarifies that one IRA Rollover per year now applies on a per taxpayer basis – not per IRA. Therefore, an individual can elect a single 60-day withdrawal and rollover in a 365-day period regardless of the number or types of IRAs owned.

What death benefits are available from a SIMPLE IRA?

When a SIMPLE IRA account owner dies, an inherited or beneficial IRA is created. However, inherited IRA treatment differs depending on who inherits the account. SIMPLE IRAs inherited by a surviving spouse differ from a non-spouse beneficiary.

Spousal beneficiary

A spousal beneficiary has the following options available upon inheriting a SIMPLE IRA:

  • Treat the account as his or her own
  • Rollover the IRA into his or her own IRA
  • Transfer the IRA to an employer sponsored plan in which spouse is a participant
  • Remain a beneficiary.


Non-spouse beneficiary

Inheriting a SIMPLE IRA from someone other than a spouse provides more limited options. 

Non-spouse beneficiary has the following options available upon inheriting a SIMPLE IRA:

  • Liquidate the entire account
  • Make withdrawals equaling the entire account value by the end of the fifth calendar year following the account owners death
  • “Stretch” the withdrawals over the beneficiary's life expectancy

 

What is a Stretch IRA?

A Stretch IRA is a distribution strategy available to an IRA beneficiary. The beneficiary “stretches” withdrawals over the beneficiary’s life expectancy.

Click here for more information on our Stretch IRA

We also offer a calculator to assist investors in calculating minimum payout amounts

Can I convert my existing SIMPLE IRA(s) to a Roth IRA?

Yes. All investors, regardless of age or income, including those with SEP and SIMPLE IRAs (2-year hold period must be satisfied) are eligible to convert all or a portion of their assets to a Roth IRA. Distributing pretax IRA assets to a Roth IRA via a conversion is a taxable event – subject to taxation in the year the conversion takes place. However, if the account is held for five years and until age 59½, all proceeds including earnings are distributed free of income taxes.

Practice tip: A conversion to a Roth IRA that occurs within the first two years of participation is subject to 25% early distribution penalty.

 

 

Risks Involving the Stretch IRA Strategy: 

Withdrawals by the account holder or beneficiaries in excess of the required minimum distribution (RMD) will exhaust the account at a faster pace, reducing or eliminating the effectiveness of the stretch strategy. Distributions greater than the RMD could subject the payment to higher federal and, possibly, state income taxes. When investing assets, which will be used to stretch IRA payments, the investor must be cognizant of any front-end or back-end sales charges that can reduce the assets available. During an extended period of declining investment returns, investors will experience income fluctuations that may cause additional withdrawals to be made that will exhaust the account at a more rapid rate. There can be no guarantee that a Stretch IRA strategy will be advantageous to your specific situation, and many of its benefits are based on current tax laws, which are subject to change. If these laws change, an investor's ability to maintain estimated distributions may be affected. Lengthy distribution periods, much like those involved in a Stretch IRA, expose an investor to significant market risk.

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