What is a SINGLE IRA? Pension plan rules, FAQ

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a small business version of a 401 (k) plan and is subject to many of the same rules as individual retirement accounts (IRAs). This occupational retirement savings account allows eligible employees to invest part of their pre-tax salary in an individual account and to collect compulsory employer contributions.

Small businesses – typically those with 100 or fewer employees – sometimes offer workers a SIMPLE IRA plan instead of a 401 (k) because (as the acronym suggests) it’s easier to set up and run. administer. If you are working for yourself, you are also allowed to contribute to a SIMPLE IRA, although there may be better ones. retirement plan options for the self-employed.

What is a SINGLE IRA and how does it work?

A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a retirement plan for small businesses with fewer than 100 employees. SIMPLE IRAs are similar to other individual retirement accounts (IRAs) and are easier to set up than 401 (k), but employee contribution limits are lower than 401 (k).

SINGLE IRAs have many of the same investment, distribution, and rollover rules as other types of retirement plans. The main drawback for some companies could be the fact that SIMPLE IRAs require mandatory employer contributions. Employees may like this correspondence with the employer, but they may be less satisfied with the lower contribution limits, compared to 401 (k) s, and the lack of a Roth version.

The mandatory employer contribution is what differentiates SIMPLE IRAs from some other employer sponsored retirement plans.

Simple IRA vs Traditional IRA

Simple IRAs have some similarities to a Traditional IRA. Contributions are tax-deferred, which means the amount you save up to your contribution limit reduces your taxable income for the year, and investment growth is tax-deferred until you start receiving. distributions at retirement.

Simple IRA vs. 401 (k)

In some ways, SIMPLE IRAs are similar to 401 (k) plans: eligible employees indicate the amount (if any) of each paycheck they wish to put into the account, and the money is automatically diverted to the account. individual placement of the worker.


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SIMPLE IRA Contribution Limits for 2020 and 2021

The employee contribution limits for a SINGLE IRA in 2020 and 2021 are $ 13,500 per year for those under 50. People aged 50 and over can make an additional catch-up contribution of $ 3,000.

Employer contributions are compulsory and can be paid using one of the following two methods:

  • Provide matching contributions up to 3% of the employee’s salary, without being limited by an annual compensation limit.

  • Make non-optional contributions equal to 2% of the employee’s compensation based on a maximum salary of $ 285,000 in 2020 and $ 290,000 in 2021.

Here’s how to set up a SIMPLE IRA

Opening a SINGLE IRA is similar to opening a traditional IRA. However, if you are a business owner, you need to complete additional reporting requirements and documents to establish the plan. Most IRA providers offer SINGLE IRAs that you can open online.

There are three steps to setting up a SIMPLE IRA plan:

  1. Choose the type of SIMPLE IRA plan you want to use by filing either IRS Form 5305-SIMPLE (if you deposit contributions at a designated financial institution) or IRS Form 5304-SIMPLE (if employees are allowed to choose a financial institution for the account).

  2. Provide eligible employees with information about the SIMPLE IRA plan.

If you work at a company that offers a SIMPLE IRA, your employer will have you fill out one of the above forms to create an individual account.

Benefits for employers

For employers, SIMPLE IRAs have start-up and operating costs that are generally lower than setting up a 401 (k) plan. Employers receive a tax deduction for their contributions to employee accounts.

Benefits for employees

  • Employers must contribute to employee accounts, as detailed in the previous section. Employees may see this as an advantage of SIMPLE plans, but some employers may find this rule to be a barrier.

  • Employees do not have to subscribe to salary deferrals to obtain the employer’s contribution if your employer chooses the 2% non-elective contribution option. If your plan uses the optional salary reduction / match method, you must contribute to get the equivalent.

  • The eligibility conditions are weak. Generally, you are eligible to participate in a SINGLE IRA if you have received at least $ 5,000 in compensation in the previous two calendar years and expect to earn at least that much during the calendar year of participation. But the IRS also allows employers to offer these accounts to employees who do not meet these standards.

  • Employer contributions are acquired immediately. With no vesting period, you own 100% of all the money in your SIMPLE IRA.

  • The IRS allows individuals to contribute to other retirement savings plans at the same time. This is handy if, for example, you have more than one job that offers an employer-sponsored pension plan, or if you also want to contribute to one. traditional or Roth IRA.

  • The investment choices tend to be more than what is offered in the 401 (k). Instead of limiting yourself to the mutual funds chosen by the 401 (k) plan administrator, you can invest in stocks, bonds, mutual funds and any other investment offered by the IRA provider.

Disadvantages of SIMPLE IRA plans

The contribution limits for SIMPLE IRA plans are lower than those for other workplace retirement plans. In 2020 and 2021, employees and individual business owners under the age of 50 are allowed to contribute $ 13,500 to a SINGLE IRA per year versus $ 19,500 to a 401 (k), and $ 16,500 to $ 26,000. $ for 50 and over.

Additionally, there is no Roth version of the SIMPLE IRA. This is a big downside considering the advantages of Roth IRAs and Roth 401 (k) s. (See “What is a Roth IRA?“for more on why we love these accounts.)

  • Equity loans are not allowed. While we don’t recommend dipping into retirement savings early, if you need them, the SIMPLE IRA doesn’t.

  • You will pay a hefty tax penalty for some early withdrawals. In general, the SIMPLE IRA distribution rules reflect traditional IRA rules, with the exception of ineligible withdrawals during the first two years of your membership. For these, you will pay an additional early withdrawal penalty of 15% on top of the standard 10% penalty. This means that if you dip into the money before the age of 59 and a half and before you have the plan for two years, you will likely owe the IRS 25% of the money you take out in penalties, plus the income taxes you owe.

  • Rollovers to another IRA or an employer-sponsored pension plan are subject to strict rules. The 25% penalty mentioned above also applies if you roll over into something other than another SINGLE IRA during the two-year period following your first participation in the plan.

Is a SIMPLE IRA right for me?

The answer depends on whether you are an employee or the employer.

For traders: If you are a sole proprietor or self-employed person and your goal is to maximize your own retirement savings, there are other retirement savings plans with higher contribution limits:

  • A solo 401 (k) allows a business owner without an employee to contribute up to $ 57,000 in 2020 and $ 58,000 in 2021, with an additional catch-up contribution of $ 6,500 if you are 50 or over. The exception to the no-employee rule is if your spouse earns income from your business.

  • A SEP IRA (Simplified Employee Pension Individual Retirement Account) looks a lot like a SIMPLE IRA. But like a 401 (k) solo, the contribution limits are much higher: you are allowed to contribute either 25% of the pay, or up to $ 57,000 in 2020 ($ 58,000 in 2021), whichever is less. high of both.

If you own a small business with employees, a SIMPLE IRA may be worthwhile if you want to provide a retirement plan for your employees, but want to avoid the additional administrative costs that can accompany a 401 (k). Just keep in mind that some employees may still want a 401 (k) because of its higher contribution limits.

For employees: Anyone who has access to the plan at work and wishes to maximize their savings must contribute to the account. Otherwise, you are leaving free money on the table.

If your plan provides for the automatic employer contribution of 2%, you will get this money even if you choose not to divert your salary. If the employer contribution is offered by matching funds, you must register to contribute a portion of your own salary to earn the matching. (Remember: you can always save in other types of retirement savings accounts besides a SINGLE IRA.)

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