The ABCs of SIMPLE IRAs

The SIMPLE IRA is a streamlined and cost-effective way for smaller employers with 100 workers or fewer to compete with larger employers by offering a defined compensation retirement plan with a company matching contribution. In effect, a SIMPLE IRA sets up a type of IRA account for each employee, and allows the employer to contribute to it via deferred employee compensation, together with a company contribution.

Contributions

There are two levels of contributions to SIMPLE IRA plans: Employee contributions -also called "elective deferrals," and employer contributions.

Employee Contributions 

Qualified employees can defer traditional IRA contributions up to $11000 or $13500 based on age for the 2018 tax year ($5,500 for those younger than age 50, and $6,500 for those who are 50 or older) - an annual figure which is subject to cost-of-living adjustments in the future. Participants can contribute an additional $1,000 in so-called "catch-up" contributions if they are age 50 or older.

Employees are eligible if they received at least $5,000 in compensation from you during any two preceding years and if they are expected to receive at least that much in the current calendar year.

Employer Contributions

Employers must generally elect one of two possible options for their own contributions to employee accounts:

• Match employee contributions, dollar for dollar, up to 3 percent of the employee's compensation. The $265,000 annual compensation limit does not apply under option 1.
• Make contributions on a non-elective basis of 2 percent of the employee's compensation - up to the annual compensation limit of $265,000 as of 2015. This figure, of course, is subject to revision based on increases in the cost of living. 

There are cases you can reduce the 3 percent matching contribution for up to a calendar year: You must not reduce the matching contribution below 1 percent. You cannot not reduce it for more than 2 out of 5 years ending with the year for which the election is effective, and you give employees reasonable notice prior to their deadline for entering into salary reduction agreements.

Once you elect a contribution method, however, you must follow through with it. You cannot change it mid-year.

Deadline: Employers must make their contributions within 30 days after the end of the month in which the salary payments deferred would have been paid to employees in cash if they had not elected salary deferral.

Tax Deduction

All employee contributions to SIMPLE IRAs are tax-deductible to the business. They are also not taxable to the employee in the current year; taxes are deferred as long as the money stays in the SIMPLE IRA. Distributions are taxable as ordinary income, and distributions prior to age 59½ may be subject to a 10 percent early withdrawal penalty. Withdrawals within the first three years may be subject to a 25 percent penalty.

Tax Credit for Starting a Plan

Congress intends to encourage as many qualifying employers as possible to start retirement plans for workers, and has authorized a tax credit worth up to $1,500 - $500 in each of the first three years of a qualified SIMPLE IRA plan - to offset startup costs.

Starting a Plan

You have until October 1 to establish a SIMPLE IRA for that calendar year. However, if you already have another SIMPLE plan or a 401(k) or 403(b) in place, you cannot establish a new SIMPLE plan.

For more information, feel free to Contact Neptune Financial to schedule an appointment.

Basic Understanding

This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.

An individual seeking information regarding their investment or retirement needs should contact a financial professional.

Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.