Benefits Of A SIMPLE IRA
Although many employers allow their workers to save for retirement using qualified plans, such as 401(k), 403(b) or 457 plans, these plans contain many rules that can be cumbersome for both employers and employees to deal with at times.
For this reason, some small businesses have chosen to use SIMPLE (Savings Incentive Match for Employees of Small Employers) IRAs instead. These plans have fewer rules and are much less complicated to administer. Using these plans offers the following key benefits:
- Tax-deferred savings. As with other types of IRAs and employer-sponsored retirement plans, SIMPLE IRAs allow employees to defer a portion of their salaries into these plans where they can grow tax-deferred until distributions are taken at retirement. This allows employee deferrals to compound more quickly over time.
- Simplification. SIMPLE IRAs do not require most of the bureaucracy that comes with qualified plans, such as discrimination and top-heavy testing, vesting schedules and tax reporting at the plan level. SIMPLE IRAs are relatively easy to set up and run, and employers don’t need to hire staff with specialized training to run these plans.
- Instant vesting. Unlike most qualified plans, matching employer contributions belong to the employee immediately and can go with them whenever they leave, regardless of their tenure there. Employer matching contributions in qualified plans usually come with either a cliff or graded vesting schedule that requires employees to stay with the employer for a certain number of years before they can take ownership of 100% of matching contributions. What's more, unlike with 401(k)s, employers who set up SIMPLE IRAs are required by law to match employee contributions.
- Reasonably high contribution limits. For 2014, employees can defer up to $12,000 of income to a SIMPLE IRA, with another $2,500 in catch-up contributions allowed if they are 50 or older, subject to cost-of-living adjustments for later years. This is less than the $17,500 contribution/$5,500 catch-up limit permitted for a 401(k) or other qualified plan. Read more from the IRS here.
- Tax credit for employers. Companies that sponsor SIMPLE IRAs are eligible to receive a tax credit for 50% of some of the administrative costs generated by the plan each year for the first three years of the plan’s life. There is a maximum ceiling of $500 per year on the amount that may be credited.
- Tax credit for employee contributions. Employees whose adjusted gross incomes are below a certain limit may be eligible to take a nonrefundable credit for up to $2,000 of contributions each year. The AGI threshold for this is also indexed for inflation each year. The amount of this credit is twice what individuals who are eligible for the Retirement Saver’s Tax Credit can receive.
- Multiple investment choices. SIMPLE IRAs contributions can be invested in "individual stocks, mutual funds and similar types of investments," according to the IRS. Many plans offer growth, growth and income, income and specialized funds such as sector funds or target-date funds that mature at a specific time.
The Bottom Line
SIMPLE IRAs provide a convenient alternative for small employers that don’t want to deal with the bureaucratic and fiduciary complexities that come with offering a qualified plan. Employees still get tax and savings benefits and also receive instant vesting of employer contributions. For more information on SIMPLE IRAs and how they can benefit you, visit the IRS website or consult your financial advisor or human resources department.
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