SIMPLE stands for Savings Incentive Match Plan for Employees, indicating that both employers and employees contribute to the plan.
➡️ Employees have the option to defer a portion of their salary into their retirement account, and employers can choose to match that contribution up to a limit of 3% (or 4% in some cases) of the employee’s compensation, or provide a fixed percentage based on the employee’s earnings.
SIMPLE IRA accounts are designed for small businesses that lack the resources to manage the administrative tasks associated with larger retirement plans.
Additionally, these accounts do not require the employer to file annual reports with the IRS. SIMPLE IRA accounts are limited to companies with 100 or fewer employees, and participants can select from various investment options for their accounts, including stocks, bonds, exchange-traded funds, mutual funds, and certificates of deposit.
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🔹How does a SIMPLE IRA Account Work?
SIMPLE IRA accounts provide employees with the tax advantages of a 401(k) plan while offering the convenience of a personal IRA. Each year, employees can decide how much of their salary they wish to contribute to their accounts.
Contributions are automatically deducted from their paychecks before federal income tax, which lowers taxable income and allows for potential tax-deferred growth of those funds.
⌛ Once employers establish a SIMPLE IRA plan, they must give employees 60 days to decide whether they want to participate in the SIMPLE plan and, if so, which type they prefer.
During the election period, employees also select the amount of their salary they wish to contribute for the following year.
🔹Contribution Limits for SIMPLE IRA Accounts
SIMPLE IRA plans require companies to contribute to their employees’ accounts in one of two ways: the company can choose to match employee contributions dollar for dollar up to a specified limit, or it can make a non-elective contribution.
➡️ In 2024, the employee contribution limits for a SIMPLE IRA account are set at $16,000 for employees under 50 years of age and $19,500 for employees aged 50 and over by the end of the calendar year.
The option to choose between employer matching contributions or non-elective contributions allows SIMPLE IRA accounts to be well-suited for companies that need to adapt to changing financial circumstances.
Employers also have the option to reduce the matching contribution percentage to as low as 1% of the annual compensation.
🔎 The SECURE 2.0 Act introduced changes to the contribution limits for SIMPLE IRA plans. Starting in 2024, for companies with 25 or fewer employees, employees will be able to contribute up to 110% of the contribution limit, and if applicable, the recovery limit for that year.
Employers with 26 to 100 employees may allow a higher contribution limit to 4% or implement a non-elective contribution of 3%.
🔹SIMPLE IRA Regulations to Encourage Long-Term Savings
Company contributions to SIMPLE IRA accounts are immediately irrevocable for the employee. Similar to personal IRA accounts, SIMPLE IRAs are structured to discourage account holders from withdrawing funds before retirement.
📌 The fundamental rules governing withdrawals and transfers from SIMPLE IRA accounts are as follows:
- Withdrawals from a SIMPLE IRA account before the age of 59½ are generally subject to a 10% penalty.
- The penalty for withdrawals made before age 59½ increases to 25% if the withdrawal occurs within the first two years of establishing the account.
- Account holders may transfer assets from a SIMPLE IRA to another SIMPLE IRA within the two-year holding period.
- Once the two-year holding period for SIMPLE IRAs is completed, account holders can also reinvest or transfer a SIMPLE IRA to another IRA or an employer plan, subject to certain restrictions based on the receiving account or plan.
- Beginning at age 73, participants are required to make minimum mandatory distributions.
These plans offer tax advantages for both employers and employees, are straightforward to manage, and encourage employees to save for retirement through the option of matching contributions.
Additionally, the plan’s rules allow both employers and employees to adjust their contribution levels annually, enabling all parties to navigate changing financial circumstances while continuing to save for retirement.
🔎 If you are a small business owner and currently do not provide your employees with a retirement savings plan, at Wave Tax we can assist you in achieving several key objectives.
📩 Contact us at info@wavetax.us