[Updated September 12, 2019]
With a STRATA Trust SIMPLE IRA, you receive benefits of an employer-sponsored plan yet retain the investment freedom and control of a self-directed IRA. SIMPLE IRAs are only available to employees of small employers who adopt a SIMPLE IRA plan to help their employees save for retirement. If you participate in or are thinking of establishing a SIMPLE IRA plan, here are eight important rules to know.
1. Any type of business or governmental entity may have a SIMPLE IRA plan, but the business cannot have more than 100 employees who earned more than $5,000 in the preceding year. The business may not maintain another retirement plan while offering the SIMPLE IRA plan.
2. SIMPLE IRA plans are easy for employers to administer and maintain. In exchange for the simple administration requirements, SIMPLE IRA plans have lower contribution limits than 401(k) plans and require the employer to make a matching or non-elective contribution to eligible employees. For 2019, an employee may defer up to $13,000 of their pay into a SIMPLE IRA ($16,000 for employees age 50+). Employers must choose to make either a matching contribution (generally 3% of the employee’s compensation) or a 2% non-elective contribution each year and must notify employees of the type and amount of the contribution that will be made.
3. The deadline for establishing a SIMPLE IRA plan is generally October 1 of the year for which the employer wants to establish the plan. A new business that comes into existence after October 1, however, may establish a SIMPLE IRA plan as soon as administratively feasible before the last day of that first calendar year.
4. Employers may set employee eligibility requirements for SIMPLE IRA contributions. The maximum requirements that may be set are:
• Have earned at least $5,000 in compensation from the employer during any two preceding calendar years; and
• Be reasonably expected to earn at least $5,000 during the current year.
5. An eligible employee who chooses to participate must open a SIMPLE IRA to receive contributions under the plan and must complete a salary reduction agreement specifying the portion of their compensation they wish to contribute to the plan. They also get to select investments for their self-directed SIMPLE IRA.
6. Employees may participate in another retirement plan sponsored by a different employer at the same time they participate in a SIMPLE IRA plan. Each person cannot contribute more than the annual salary deferral limit ($19,000 for 2019, plus available catch-up contributions) among all of their 401(k), 403(b) and SIMPLE plans. Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or Traditional IRA.
7. SIMPLE IRAs generally follow the Traditional IRA distribution and taxation rules, except that the 10% early distribution tax on distributions taken prior to age 59½ increases to 25% if early distributions are taken within two years of the first contribution to the SIMPLE IRA. Required minimum distributions (RMDs) must begin from SIMPLE IRAs when the IRA owner reaches age 70½.
8. SIMPLE IRA assets may be transferred or rolled over to another SIMPLE IRA at any time. SIMPLE IRA assets may also be moved to other tax-qualified savings arrangements but generally not until the two-year waiting period that begins with the first SIMPLE IRA contribution has passed. Traditional IRA and employer plan savings can be moved into a SIMPLE IRA after the two-year period has passed.
Before you establish and fund a SIMPLE IRA, or convert retirement savings to a SIMPLE IRA, it’s important to talk to your financial advisor or tax professional to make sure you understand all the tax consequences and evaluate the potential benefits. They may also help you create a strategy to minimize taxes, for example by conducting a series of conversions over a number of years to avoid a large tax impact in one year. Please give us a call 866-928-9394 with any questions.