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What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan option that allows small business owners to save for retirement for themselves and their employees. Any small business with fewer than 100 employees, including self-employed individuals, can open a SIMPLE IRA. Both employers and employees can make contributions and enjoy a number of tax benefits.

How Do SIMPLE IRAs Work?

As the small business owner, you must first choose a trustee to hold the retirement plan assets. There are many trustees to choose from and it’s important to do your research to find the best provider for your plan. Trustees can vary when it comes to plan fees or available investment options.

Once you’ve chosen a trustee, you will execute a written plan agreement, provide employees information about the agreement, and establish a SIMPLE IRA for each eligible employee.

Employees who are eligible for a SIMPLE IRA have earned at least $5,000 in compensation during any two years before the current calendar year and expect to receive at least $5,000 during the current calendar year. You can choose to use less restrictive participation requirements. For example, you can eliminate or reduce the compensation amounts, but you cannot use more restrictive participation requirements.

Employees can choose whether or not to contribute pre-tax dollars via a reduction from their salaries. As the employer, you are required to make annual contributions. You can choose to make matching contributions or non-elective contributions, but you must choose one. With matching contributions, you match each employee’s contributions dollar-for-dollar up to 3% of the employee’s compensation. With non-elective contributions, you contribute 2% of each employee’s compensation regardless of whether or not the employee makes salary reduction contributions.

The Benefits of a Self-Directed SIMPLE IRA

Easy set-up and Maintenance – Setting up a SIMPLE IRA plan is generally easy and is accomplished by executing a written plan agreement. You can have a custom plan designed for you, or you can utilize a prototype plan agreement. There are often low-cost options for set-up fees and annual maintenance fees, and there are limited IRS filing requirements.

High Contribution Limits – Contribution limits are considerably higher than they are for Traditional IRAs or Roth IRAs. Employees can contribute up to 100% of their compensation, up to $13,000 per year. Employees who are age 50 or older may be able to make additional catch-up contributions of $3,000. Additionally, employers have a choice when making annual contributions and can choose either matching contributions or non-elective contributions.

Tax Advantages – As a small business owner, you may enjoy tax credits for opening a retirement plan, assets in the plan grow tax-deferred, and the contributions you make are tax-deductible. When your employees (which includes yourself) make contributions, it reduces current taxable income, and contributions and earnings are not taxed until they’re distributed during retirement.

Alternative Investment Options – With a Self-Directed SIMPLE IRA, employees control their portfolios and make their own investment decisions. There is typically access to a large variety of investment options. In addition to the traditional stock, bond, and mutual fund investments, participants can invest in many alternative, non-traditional assets – such as real estate and private equity.

Why Consider a Self-Directed SIMPLE IRA?

Unfortunately, saving for retirement is not a top-of-mind priority for many people. A Self-Directed SIMPLE IRA gives small business owners the opportunity to save for their retirement dreams and invest in alternative investments.  At the same time, they are providing their employees a path to their own retirement savings, which they may not have found on their own.

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