What is a SIMPLE IRA?

Last Updated on 16th June 2022 by Jeffrey Camerda

Retirement plans like 401(k)s are familiar to most people who have worked for a firm. If you’ve never heard of a SIMPLE IRA, it stands for Savings Incentive Match Plan for Employees, and it’s one to keep an eye out for.

How a SIMPLE IRA may help you reach your retirement objectives as well as whether or not it’s the appropriate decision for you are all covered in this guide.

Simple IRA Defined

A SIMPLE IRA is a retirement plan provided by small firms with fewer than 100 workers. It is possible that small firms choose SIMPLE IRAs over 401(k) plans because they are cheaper and less cumbersome.

The criteria for these accounts are a little different. A SIMPLE IRA, for example, has an employer match incorporated into the plan. Because of this, employers are required to pay a flat 2 percent of an employee’s income, whether or not the employee decides to participate in the plan, regardless of whether or not the employee contributes to the plan.

SIMPLE IRA vs. 401(k): Which is better? 

When it comes to retirement plans, this one isn’t like the 401(k). Employee contributions to a 401(k) plan may be matched by the company, if they so desire. When circumstances are tough, matching programs are among the first to be slashed. If a company chooses to participate in the SIMPLE IRA program, it is obligated to match the employee’s contributions dollar for dollar up to 3% of their income.

In other ways, a SIMPLE IRA is similar to a 401(k) account. The money in the plan grows tax-deferred until it is taken at retirement, and contributions are pre-tax. A 10% penalty will be imposed if the money is withdrawn before the age of 59 1/2. (25 percent if you withdraw it within two years of enrolling in the plan).

Your company’s SIMPLE IRA is likely to provide a broad range of stock and bond mutual funds for your consideration. SIMPLE IRA or 401(k)? It’s not about the size of your firm or how many workers you have; rather, it’s about how much time and money you’re willing to put into maintaining the plan. In contrast to 401(k)s and other more standard retirement plans, SIMPLE IRAs don’t usually need employers to file any paperwork and have reduced operational expenses.

Withdrawing from your SIMPLE IRA before you’ve reached the age of 59 1/2 is generally punishable by a 10% tax and a penalty of up to 25%, depending on how long you’ve participated in the plan.

Contribution Requirements for SIMPLE IRAs

Unlike 401(k) plans, SIMPLE IRAs have differing contribution limits. An employee’s SIMPLE IRA contribution limit will rise from $13,500 to $14,000 in 2022. In 2022, individuals over the age of 50 may contribute up to $17,000 to their SIMPLE IRAs, an increase of $3,000 over the previous year’s cap of $16,500.

People may save up to $26,500 in 2022 with a 401(k), which is an increase from $19,500 or $25,500 in 2021. As you can see, a 401(k) plan allows you to save more money.

You may contribute up to $20,500 to all of your workplace retirement plans, including a 401(k), in 2022 (up from $19,500 in 2021) if you have a SIMPLE IRA.

The larger contribution limitations of a 401(k) plan may make it a better option for high-paid small company owners like doctors, dentists, and attorneys than a SIMPLE IRA.

Rollovers With SIMPLE IRAs

Depending on how long you’ve been a member of the SIMPLE IRA, rollovers might be simple or difficult. There is a two-year limit on the number of times you may transfer money from one SIMPLE IRA account to another. In other words, unless you’re at least 59 1/2 years old or qualify for an exemption, you’ll have to pay a 25 percent tax on the amount withdrawn.

After at least two years of participation in the plan, you may transfer the money into practically any form of IRA or even an employer-sponsored retirement plan such as 401(k) if you are eligible (k). Despite the fact that it is legal, it is not recommended to do a rollover to a Roth IRA due to the fact that you will be required to include any earnings increase in your taxable income.

The following are the most important takeaways;

  • Employers that have less than 100 workers may participate in a SIMPLE IRA, or Savings Incentive Match Plan for Employees, which is an employer-sponsored retirement plan.
  • However, there are key distinctions between SIMPLE IRAs and traditional 401(k) plans when it comes to corporate matching contributions and other aspects.
  • Depending on how long you’ve been a participant in the Straightforward IRA, rollovers might be simple or difficult.

Jeffrey Camerda

Dr. Jeffery Camerda, PhD, is a financial planner who specializes in wealth management and retirement planning.With a PhD in Economics and Financial Planning, Jeffery represents the highest level of financial planning expertise and achievement in the USAIn addition to preparing you for a career in financial planning, a PhD in economics and finance also prepares you for academic pursuits, such as becoming a university professor in teaching or doing research.Here at the Wealth Builder, our financial advisory company was founded in 2007 and services all across the USA with over 16 years of expertise.In order to provide the finest advice and services, we pay close attention to the specific financial circumstances and requirements of each client.In order to guarantee that our clients don't get a sales pitch for insurance or investments, as well as a lack of conflict of interest from a prospective commission-bearing corporations, Jeffery focuses on fee-based services. Financial planning for wealth managers, financial well-being workshops, and personal financial planning packages are all part of the company's offering.Jeffrey Camarda, PhD, CFA, EA is also the founder of the Family Wealth Education Institute, is a member of the Financial Planning Association and serves as the Chairman of Camarda Wealth Advisory Group

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