Simple IRA Plans
The Simple IRA is a qualified retirement plan leveraged by employers and most often smaller or self- employed individuals. Simple IRA plans are often most suitable for employers that have near 25 employees or less, although they are available for businesses of any size. The annual contributions to a Simple IRA plan are tax deductible for the employee and the employer, providing benefits to both parties. The primary difference between a Simple IRA and other qualified plans is that employer is required to save into the Simple IRA plan on behalf of the employee.
The contributions that the employer is required to make to the Simple IRA on an annual basis can be done on an elective deferral basis or a non-elective deferral basis. An elective deferral is one that is a specified amount contributed annually. The non-elective contributions are paid into the employee’s account annually regardless of whether the employee contributes their own funds or not.
Like other qualified plans, there is a limitation on the annual contribution amounts, established by the IRS annually. It is important to review the restrictions annually to ensure that investors are in compliance with these guidelines. Also, when looking into investment options, it is important to understand both the advantages and disadvantages of each investment option prior to making a personal decision.
Some of the advantages to employers of using a Simple IRA include:
- The contributions that are made into a Simple IRA are tax deductible as a business expense on an annual basis.
- The plan documents are simple and easy to administer for the employer.
- The annual administration expenses are often lower than other qualified plans.
- There is not an annual government reporting requirement for the employer.
Some of the advantages of a Simple IRA to the employee include:
- The annual contributions that are made into the Simple IRA are immediately 100% vested, including any contributions that are made by the employer.
- All contributions that are made into a Simple IRA are tax deferred, allowing the funds to grow quicker than in a taxable account used for retirement.
- Employees have the option to leverage their own investment selections within a Simple IRA, giving the option to build the most suitable investment portfolio based upon their own goals and risk tolerance.
Just like any investment vehicle, there are both advantages and disadvantages to be considered. Some of the disadvantages to employers when using a Simple IRA are:
- When a Simple IRA is used by the employer, the ability to use other qualified plans is limited.
- There is limited flexibility for the employer’s contributions to the Simple IRA on an annual basis.
- There are lower annual contributions for the Simple IRA than other qualified plans.
- Employers cannot establish a vesting schedule for their contributions for employees. This means that employees will gain immediate access to these annual employer contributions.
Some of the disadvantages for employees with regards to the Simple IRA include:
- Simple IRA accounts do not permit the use of loans which are popular for others to use when available in other qualified plans.
- There are rollover and contribution limits for this qualified plan.