Eligible employees may make elective-deferral contributions to their SIMPLE IRAs and the employer may elect to make either matching or nonelective contributions. Employer contributions are mandatory for each year that the SIMPLE IRA plan is maintained.
Employee deferral contributions must be deposited to each employee's SIMPLE IRA by the 30th day following the month for which the deferral applies. For instance, employee deferral contributions for April 2018 must be deposited to the employee's SIMPLE IRAs by May 30, 2018.
Employers have until their tax-filing deadline (including extensions) to deposit matching or nonelective contributions to the employees' SIMPLE IRAs.
Eligible employees may defer 100% of compensation up to the annual dollar limit to their SIMPLE IRAs. Employees who are at least age 50 by the end of the applicable year may defer additional amounts. These additional amounts are referred to as "catch-up" contributions.
The dollar limit is 100% of compensation, up to $12,500 ($13,000 for 2019). Participants who are at least age 50 by the end of the year may make an additional catch-up contribution of $3,000.
An employer is required to make one of two kinds of contributions:
One important difference between a SIMPLE IRA and a 401(k): Employer contributions to the employee's account vest immediately. For 401(k)s, employees generally have to work for the employer for a specified period of time before becoming fully vested and receiving the employer's contributions to their account.
An employer who elects to make matching contributions to a SIMPLE IRA may reduce the 3% matching contribution to a minimum of 1% for two out of five years, or the employer may replace the 3% matching contribution with a 2% nonelective contribution. For any year the employer replaces the matching contribution with a 2% nonelective contribution, the employer's contribution is treated as if it were a 3% matching contribution for the purposes of the five-year period. For instance, an employer who chooses to make matching contributions but makes a 2% nonelective contribution for one year is, for that year, treated as if he made a 3% matching contribution. This means that the employer still has two years of the five to make a matching contribution that is less than 3%.
|Example: SIMPLE IRA Matching Contribution Rules
ABC Inc. maintains a SIMPLE IRA Plan for 2014, 2015, 2016, 2017 and 2018. ABC elects to make matching contributions to the SIMPLE IRA plan, and contributions to the plan occur as follows:
The 2% nonelective contribution is subject to a compensation cap of $280,000 ($275,000 in 2018). This means that the employer may not consider compensation in excess of that amount when determining the amount of nonelective contributions. The salary cap, however, does not apply to matching contributions.
The following examples illustrate how the contribution limits apply.
|Example: SIMPLE IRA Employer Matching Contribution Limits
XYZ Corporation maintains a SIMPLE IRA plan, and for the 2018 plan year, XYZ elected to make a matching contribution of 3% on behalf of each eligible employee. The following table shows each employee's wage, the amounts each employee deferred for the 2018 plan year, and the employer's matching contributions.
|Example: Employer Making 2% Nonelective Contributions
The facts are the same as those in the example above except that XYZ chose to make a 2% nonelective contribution. The contribution amounts are as follows:
The investment options for a SIMPLE IRA are varied; relatively few investments are not permitted for a SIMPLE IRA. The investment choices of the SIMPLE IRA owner depend on the SIMPLE IRA product and the financial institution. Some choices may be limited to a preselected core group of investments or a specific investment. With SIMPLE IRAs that are commonly referred to as self-directed SIMPLE IRAs, the owner is free to choose the investments.
Permissible investments for SIMPLE IRAs include stocks, bonds, mutual funds, real estate, some coins and money market funds.
SIMPLE IRAs cannot invest in collectibles, which include art works, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and certain other tangible personal property. The exceptions are U.S. gold coins, silver coins minted by the Treasury Department, and certain platinum, gold, silver, palladium and platinum bullion. Volume limitations apply.
Some financial institutions place additional restrictions on SIMPLE IRA investments.SIMPLE IRAs: Distributions