SIMPLE IRA?: Retirement Account Options for Self-Employment Income (2023 and 2024)

As part of our series exploring retirement account options for self-employed individuals, we now focus on the Savings Incentive Match Plan for Employees (SIMPLE) IRA. This is an appealing choice for small business owners with less than 100 employees, thanks to its low administrative requirements and costs associated with maintaining the plan.

While “simple” might be in the name, SIMPLE IRAs are not necessarily the most straightforward or simplest option among retirement accounts designed for self-employed workers. We’ll explore why this is and walk you through other key aspects of a SIMPLE IRA, including qualifications, contribution limits, deadlines, rollovers, and more.

What Is a SIMPLE IRA?

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan that enables small business owners to provide benefits for their employees while setting aside money for their own future financial security. Like other traditional IRAs, contributions are tax-deductible, and earnings grow on a tax-deferred basis until withdrawn.

Similar to 401(k) plans, SIMPLE IRAs also allow employers to make matching contributions. This feature can help incentivize employees to participate in the plan. However, unlike 401(k) plans, SIMPLE IRAs have far fewer administrative requirements and lower costs for small businesses.

Qualifying for a SIMPLE IRA

To establish a SIMPLE IRA as either an employer or self-employed individual, you must meet the following qualifications:

1. Employer qualification: Have 100 or fewer employees who received at least $5,000 in compensation from you for any two preceding years and are expected to receive the same amount in the current year.
2. Self-employed qualification: Meet the requirements for self-employment taxation based on your net earnings from self-employment (i.e., profit less allowable deductions) exceeding $5,000 in any two preceding years and being expected to be at least that amount in the current year.

If you are an employee of a business with a SIMPLE IRA plan, you must have earned at least $5,000 from that employer during any two preceding years and expect to earn the same or more in the current year.

SIMPLE IRA Contribution Limits

For 2023, employees can contribute up to $16,000 annually to their SIMPLE IRA (up from $15,500 in 2022). If you are over age 50, the “catch-up” contribution limit increases to $7,500.

Employers must contribute either a 3% non-elective contribution for all eligible employees or a matching contribution up to 3%. In the latter case, employee contributions are not required. If you choose to match your employees’ contributions, note that you cannot exceed the annual limit of $22,500 (or $27,500 if over age 50).

SIMPLE IRA Deadlines and Rollovers

The contribution deadlines for a SIMPLE IRA are two-fold:

1. Employee Contributions: These must be made by the due date of your tax return (including extensions), usually October 15th for individuals who file on extension.
2. Employer Matching Contributions: These are due no later than the same due date as employee contributions, or 30 days after the close of the employer’s last calendar quarter in the year that the employer becomes obligated to make a matching contribution, whichever is earlier.

When it comes to rollovers, you can move funds from your SIMPLE IRA to other retirement accounts without issue:

• A SIMPLE IRA can be rolled into another SIMPLE IRA, SEP IRA, or Traditional IRA.
• It can also be transferred to a Roth IRA, but any rollover amount will be taxed as income for the year of the transfer.
• Transfers between SIMPLE IRAs are not considered taxable income or distributions.

However, an important caveat is that if you have a SIMPLE IRA, you cannot move it into another retirement plan without two years having passed from the date the employee first participated in the plan (with some exceptions).

SIMPLE IRA Calculators and Brokerages

To help determine your contribution limits and compare them to other retirement accounts, SIMPLE IRA contribution calculators can be a valuable resource. You can find these tools on various financial websites or through discount brokers. Some examples of popular online brokers that offer SIMPLE IRA options include Vanguard, Fidelity, and Schwab.

Before establishing your account, research minimum balance requirements and any associated fees (such as maintenance and inactivity fees) at the brokerage firm you select. Keep in mind that investment offerings can also vary between brokers.

Withdrawal Rules and Tax Consequences

It’s crucial to familiarize yourself with SIMPLE IRA withdrawal rules, which are more restrictive than those of traditional IRAs or 401(k) plans. Distributions from a SIMPLE IRA before the age of 59½ may result in an additional 25% penalty tax on early withdrawals (in addition to ordinary income taxes).

The following exceptions apply:

• Separated employment: If you leave your job, you can take distributions without penalty after reaching age 55. However, you must have reached age 55 or older in the year you separated from the employer sponsoring the SIMPLE IRA.
• Financial hardship: Distributions may be taken for medical expenses exceeding 7.5% of your adjusted gross income, certain educational expenses for yourself, higher education costs for children, and first-time home purchases ($10,000 lifetime maximum).

Seeking Professional Advice

As with any financial planning, it’s prudent to consult a tax advisor or financial planner when establishing a SIMPLE IRA. They can provide personalized guidance tailored to your unique circumstances and help ensure you remain compliant with all relevant regulations.

In summary, SIMPLE IRAs offer small business owners and self-employed individuals an attractive retirement savings option with lower costs and less administrative burden than traditional 401(k) plans. By understanding the rules and limitations of these accounts, you can make informed decisions about your financial future.