All About the Simple IRA for Small Business

Operating a small business at a profit is challenge enough, and often employers are hesitant to add a layer of overhead and management to set up and maintain a retirement account for themselves and employees. There is a solution in the Simple IRA, named that way because it is easy to set up and manage.

What is a Simple IRA?

The Simple IRA is an individual retirement account for small businesses that allows pre-tax deposits and tax deferred growthi.

  • Employee contributions are allowed up to a limit of $13,500 yearly, or $16,500 for those over 50 years of age.
  • Employers can match employee contributions up to 3% of their annual salary/wage.

SIMPLE IRAs (Savings Incentive Match Plans for Employees) can be offered by employers with fewer than 100 employees. They are a good option for small businesses to help their employees to save due to the simplicity of setting them up and maintaining them.

How the Simple IRA Works

The Simple IRA allows employers with fewer than 100 employees to allow the employees to contribute a portion of their compensation to the IRA. The employer is allowed to match that contribution up to 3% of the salary of the employee.

The employer can also choose to make “non-elective contributions.” These are contributions to the IRA of the employee even if the employee does not themselves contribute. Non-elective contributions are limited to 2% of the salary of the employee.

The employer’s contributions are tax deductible. The employees’ contributions grow tax free in the account and not taxed until withdrawal. These are intended as retirement savings tools, so early withdrawal before age 59 ½ will trigger a 10% penalty. The penalty jumps to 25% if the withdrawal is within the first two years of participation in the plan.

Eligibility Requirements

There are requitements for both the employer and the employees:

  • Employer requirements – The employer must have fewer than 100 employees and not offer any other retirement plans. They must agree to matching contributions up to 3% of the employee’s wages or 2% in the case of non-elective contributions.
  • Employee requirements – In order to be eligible to participate in the plan, the employee must have earned at least $5,000 in the prior two years and expect to receive at least $5,000 in compensation in the current year.

There are no income limits for participation.

Simple IRA Contribution Limits

The contributions limits vary by tax year. For 2021, the limits are:

Participant DetailsAnnual Contribution
Employee under age 50Up to $13,500
Employee age 50 and overUp to $16,500
Employer non-elective contributionsUp to2% of employee salary
Dollar for dollar matching contributionsUp to 3% of employee salary

If you own a small business, a Simple IRA can be a tool for attracting and keeping employees. They are easy to set up, and they have low administrative costs and immediate vesting.

i What to know about SIMPLE IRAs: Retirement accounts for small businesses and their employees – IRA.gov

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