Know Your Small Business Retirement Plan Options: What is a SIMPLE IRA? | Trust Company of America - Millennium Trust Company

Know Your Small Business Retirement Plan Options: What is a SIMPLE IRA?

November 25, 2022
By Millennium Trust
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Given the tight labor market and candidate preference for employers offering robust benefits packages, small businesses — those with 100 or fewer employees — face a dilemma if they want to attract qualified candidates. While a 401(k) retirement plan is often part of a competitive benefits package, such a retirement plan requires a commitment to ongoing administrative and reporting responsibilities, which may add considerable costs. That’s why many small businesses turn to a Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan as a cost-effective alternative.

How does a SIMPLE IRA Plan compare to a 401(k) Plan?

A SIMPLE IRA, like a 401(k), enables employees to contribute a percentage of their salary to the plan, where it can grow on a tax-deferred basis, meaning the earnings are not taxed until withdrawn. Also, like a 401(k), a SIMPLE IRA plan typically offers plan participants access to a range of investment options. Small businesses may also be eligible to receive a tax credit if they set up a SIMPLE IRA plan with an auto-enrollment feature.

  • However, there are some key differences between these two types of retirement plans: a SIMPLE IRA plan is easy to establish and administer, does not require specially trained staff members, non-discrimination and top-heavy testing, vesting schedules, or complex tax reporting.
  • A SIMPLE IRA plan does require contributions by the employer for each plan participant, which can be a 3% matching contribution or 2% nonelective contribution, chosen annually by the employer. To learn more see the IRS guidelines for setting up a SIMPLE IRA.
  • Unlike most 401(k) plan, employees are immediately and fully vested in their SIMPLE IRAs from the time of their first contribution, which can be an attractive employee benefit.
  • Contribution limits are lower for SIMPLE IRAs than for 401(k) plans:

2023 Contribution Limits

401(k)

SIMPLE IRA

Employee Limit

$22,500

$15,500

Catch-up for Employees aged 50 and over

$7,500

$3,500

A win-win for small business owners and employees

A SIMPLE IRA plan may be a great fit for businesses, self-employed individuals, tax-exempt organizations, and governmental entities that have no more than 100 employees earning $5,000 or more in compensation during the preceding calendar year.

For employees, a SIMPLE IRA plan offers a 401(k)-like saving experience, while saving your business the considerable cost of administrating a traditional 401(k) plan. To decide if a SIMPLE IRA plan or other type of retirement plan is right for your business, try our Retirement Savings Selector Tool.

Try our Selector Tool

The material in this article is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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