The SIMPLE IRA - Savings Incentive Match Plan For Employees
The Savings Incentive Match Plan for Employees (SIMPLE) was designed as an IRA plan especially for small businesses with 100 or fewer employees. It allows these businesses to offer a tax-advantaged, company-sponsored retirement plan to their employees.
With a SIMPLE plan, employees can choose to make salary reduction/deferral contributions directly into an Equity Trust SIMPLE IRA, rather than receiving these amounts as part of their regular salary. There is a maximum employee contribution of $10,500 for 2007, increasing to $10,500 in 2008. In addition, if you are 50 years of age or older, the maximum employee contribution is $13,000 in 2007.
Under a SIMPLE IRA an employer must make either a matching contribution related to the employee's elective contribution on a dollar-for-dollar basis up to a limit of 3% of the employee's compensation or, in the alternative, a nonelective employer contribution to each employee equal to 2% of each eligible employee's compensation.
- Business Eligibility - Generally, small businesses (which include self-employed individuals, sole proprietors, partnerships and corporations) that employ 100 or fewer employees are eligible.
- Employee Eligibility - The employee must have earned at least $5,000 in the two preceding years and reasonably expect to earn at least $5,000 for the current year. These requirements are the maximum and can be reduced by the employer.
- Spousal Eligibility - Your spouse and children may also participate in the plan and open their own Equity Trust SIMPLE IRAs - as long as they are employees of the company and meet the income requirements.
- Employee Contributions - Employees may contribute up to 100% of their annual compensation up to $10,500 for 2007, increasing to $10,500 in 2008. In addition, if you are 50 years of age or older, the maximum employee contribution is $13,000 in 2007, increasing to $13,000 in 2008.
- Employer Contributions - An employer must make either a matching contribution related to employee's elective contribution on a dollar-for-dollar basis up to a limit of 3% of the employee's compensation or, in the alternative, the employer can make a nonelective employer contribution to each employee equal equal to 2% of such eligible employee's compensation.
- Deductions - Employees may deduct their contributions from personal taxable income, while the employer may deduct the matching amount from the business' taxable income. If you are self-employed, you receive both of these deductions!
As with Traditional and Roth IRAs, clients can use funds from their SIMPLE IRA to invest in any of the various investment vehicles offered at Equity Trust (see Self-Directed IRA Investment Opportunities at Equity Trust). You know best how you would like to handle your investments - we are here to help you make it happen.
Below, we provide answers to some of the commonly asked questions about the SIMPLE IRA. You may also want to refer to the self-directed SEP IRA vs. self-directed SIMPLE IRA comparison and use the Equity Trust small business retirement plan calculator. For more details about the SIMPLE IRA, please refer to IRS Publication 560.
- Which employers can establish a SIMPLE Plan?
- Which employees are eligible to participate in a SIMPLE Plan?
- How much can be contributed to a SIMPLE IRA?
- Must employers make contributions for each employee?
- Are contributions to a SIMPLE IRA tax-deductible?
- Are investments inside a SIMPLE IRA tax-deferred?
- Can I have a regular IRA in addition to my SIMPLE IRA?
- Can SIMPLE IRA funds be rolled over into another account such as a regular IRA?
- What are the rules for distributions/withdrawals/rollovers/transfers?
- What is the deadline for establishing a SIMPLE plan?
- What is the deadline for a contribution to the SIMPLE plan?
- Can you give me an example of how a SIMPLE IRA plan can work for me?
- How do I open a SIMPLE IRA at Equity Trust?
- How do I transfer funds from another IRA, Qualified Plan or Tax-Sheltered Annuity to Equity Trust?
Which employers can establish a SIMPLE Plan?
Generally, any business can establish a SIMPLE plan if it has 100 or fewer employees who earned $5,000 or more in compensation during the preceding year and does not concurrently maintain any other employer-sponsored retirement plan (a limited exception applies during a specified transition period after a business acquisition, disposition or similar business transaction involving the employer).
Which employees are eligible to participate in a SIMPLE Plan?
Each employee who received at least $5,000 in compensation from the employer during any two preceding calendar years (whether or not consecutive) and who is reasonably expected to receive at least $5,000 in compensation during the current calendar year must be eligible to participate in the SIMPLE IRA. An employer may elect to exclude union employees, airline pilots and nonresident aliens (although such employees must be included in calculating the 100 employee coverage test). An employer may impose less-restrictive eligibility requirements, such as eliminating or reducing the prior year compensation rule, the current compensation rule, or both. The employer, however, cannot impose more restrictive eligibility requirements.
How much may an employee contribute to a SIMPLE IRA?
An employee may elect to make a pre-tax salary reduction contribution to a SIMPLE IRA, rather than have the amount paid directly to the employee in cash. An employee may make an annual compensation or the maximum dollar limitation. The maximum dollar limitation for 2007 is $10,500 ($10,500 in 2008). For years beginning after 2007, cost-of-living adjustments will be made to the maximum dollar amount by the Secretary of Treasury. In addition, employees who have attained age 50 by the end of the calendar year, may elect to make an additional "catch-up" in 2007 and 2008 is $2,500, which will then indexed for inflation and increase in $500 increments. The employer must contribute an employee's elective contributions to the SIMPLE IRA no later than 30 days after the last day of the month for which the contributions are made.
Must employers make contributions for each employee?
Yes. An employer must make either a matching contribution or a nonelective contribution under a SIMPLE IRA plan. If the employer chooses to make a matching contribution on a dollar-for-dollar basis up to a limit of 3% of the employee's compensation. The 3% limit on matching contributions may be reduced for a calendar year at the election of the employer, but only if: (i.) the limit is not reduced below below 1%; (ii.) the limit is not reduced for more than 2 years out of the 5-year period that ends with the year for which the election is effective; and (iii.) employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which the employees may enter into salary reduction agreements regarding their contribution to the SIMPLE IRA.
In the alternative, an employer may elect to make a nonelective contribution of 2% of compensation for each eligible employee. A nonelective contribution must be made for each eligible employee regardless of whether the employee actually elects to make a salary reduction contribution. For purposes of the 2% nonelective contribution, the annual compensation limitation (i.e. $220,000 in 2006 as may be subsequently adjusted) applies.
Are contributions to a SIMPLE IRA tax-deductible?
Yes. Contributions under a SIMPLE IRA are deductible in the taxable year of the employer with or within which the calendar year for which contributions were made ends. Contributions will be treated as made for a particular taxable year if they are made on account of that taxable year and are made by the due date (including extensions) prescribed by law for filing the return for the taxable year.
Are investments inside a SIMPLE IRA tax-deferred?
Yes. All investments are tax-deferred until they are withdrawn.
Can I have a regular IRA in addition to my SIMPLE IRA?
Yes. A SIMPLE IRA owner can have a regular IRA as well.
Can SIMPLE IRA funds be rolled over into another account such as a regular IRA?
Yes. A tax-free rollover may be made from one SIMPLE IRA to another at any time. Further, a rollover may also be made from a SIMPLE IRA to a traditional IRA, Roth IRA or some other qualified retirement arrangement, provided that the individual has participated in the SIMPLE IRA for a two-year period. If such a contribution is made during the two-year period, the contribution is considered a distribution from the SIMPLE IRA and will be includible in the individual's income and subject to an additional penalty tax.
What are the rules for distributions/withdrawals/rollovers/transfers?
Generally, distributions from a SIMPLE IRA are taxed like distributions from a Traditional IRA - the distributions are includible in the individuals' income when withdrawn from the SIMPLE IRA and taxed as ordinary income. In addition, a special rule applies to distributions received from a SIMPLE IRA during the two-year period beginning on the date on which the individual first participated in the plan. Under the special rule, if the 10% early distribution penalty tax applies and no early distribution exception is applicable, the penalty tax increased from 10% to 25%. For additional information regarding the tax treatment of distributions, rollovers, RMDs and any applicable income tax withholding, please see IRS Publication 590.
What is the deadline for establishing a SIMPLE plan?
An employer may establish a SIMPLE IRA on any date between January 1 and October 1. The October 1 deadline does not apply to new employers that come into existence after October 1 of the year the SIMPLE IRA plan is established, as long as the employer establishes the SIMPLE IRA as soon as administratively feasible after the employer comes into existence. A SIMPLE IRA must be established on a calendar-year basis and the employer must notify each eligible employee, immediately before the employee's election period, of the employee's opportunity to make or modify a salary reduction contribution amount to the SIMPLE IRA. The employer must also provide a summary description of the SIMPLE IRA that describes the rights granted to employees under the arrangement.
What is the deadline for an employer contribution to a SIMPLE IRA plan?
The deadline for SIMPLE contributions is the tax-filing deadline of that company, including extensions.
Can you give me an example of how a SIMPLE IRA can work for me?
In 2006, John Smith and his wife each earns $50,000 a year from their real estate business, in which they are the only employees. The Smiths believe they pay too much in taxes, and they would like to reduce their taxable income as well as contribute the maximum to an IRA. They plan to make real estate investments similar to those in their business, while compounding their profits, tax-deferred. In order to optimize their IRA contributions, they both decide to open a Roth IRA and SIMPLE IRA.
The Smiths are able to each contribute $4,000 to their Roth IRAs, as well as another $10,000 to their SIMPLE IRAs as employees of their real estate company. Finally, as employers, they have also decided that they will match 3% of each employee’s annual compensation. ($50,000 x 3% = $1,500 each)
In this instance, the Smiths are able to wear two hats, one as employees and the other as an employer. Because of their participation in these two IRAs, the Smiths have been able to:
- Contribute $31,000 ($8,000 + $20,000 + $3,000) to their IRAs this year, which can be used to invest in real estate.
- Lower their taxable income from $100,000 to $77,000 with their $23,000 in SIMPLE IRA contributions (Roth IRA contributions are not tax-deductible).
Once the plans have been established, a SIMPLE and SEP IRA follow the same guidelines as a Roth IRA or Traditional IRA. The only exception is that a SIMPLE IRA must stay as a SIMPLE for two years before it can be converted to a Roth IRA.
At Equity Trust Company, clients have the option of using funds from their SIMPLE, SEP or Individual(k) Plan to invest in all forms of real estate, as well as any other IRS-permitted investments. All of these small business retirement plans allow investors to enjoy the benefits of tax-deferred, compounded growth while choosing real estate or other alternative investments in which they have knowledge and expertise.
How do I open a SIMPLE IRA at Equity Trust?
Instructions on how to open a self-directed SEP IRA at Equity Trust.
How do I transfer funds from another IRA, Qualified Plan or Tax-Sheltered Annuity to Equity Trust?
Instructions on how to transfer and rollover IRAs into an Equity Trust IRA.