SIMPLE IRA Pros and Cons | SDIRA | Equity Trust

If you own a small business, a SIMPLE IRA is a great retirement option, offering tax-deductible contributions and tax-free earnings until withdrawal. Access your free guide to small business retirement plans here: https://eqtytrst.co/3Y0G2JI

John Bowens explains the pros and cons of a SIMPLE IRA, designed for businesses with 100 or fewer employees. This plan helps you manage employee retirement needs while providing valuable tax benefits. Eligibility requires meeting the employee limit and not maintaining another qualified plan, except for collective bargaining employees.

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0:00 - Intro
0:49 - SIMPLE IRA Contribution Limits for Employees
1:34 - Employer and Employee Contributions for SIMPLE IRA
2:28 - Pros and Cons of SIMPLE IRA vs. SEP IRA and Solo 401(k)


Transcript

Alright, let's go ahead and jump into the last business retirement account, the SIMPLE IRA. This is the Savings Incentive Match Plan for Employees. The SIMPLE IRA came about a ways after the SEP IRA but a little bit before the Solo 401k. I like to refer to the SIMPLE IRA as a hybrid between an IRA and a 401k. If you do have employees for your business and therefore don’t qualify for a Solo 401k or a SEP IRA, which can be a more costly plan, a SIMPLE IRA might be a good fit for you. It can be a lower-cost way to have a retirement plan for you and your eligible employees.

Let’s talk about contribution limits. How much can you contribute to a SIMPLE IRA? $13,500 as an employee contribution if you’re under the age of 50, and $16,500 when you're 50 and over. These are the limits for 2020. If you're watching this in a future year, just check out the IRS website for updated contribution limits, as they tend to change year over year. Just like the Solo 401k, this is up to 100% of your earned income. So, if you're only paying yourself, say $14,000, and you're under 50, you can still get the full $13,500 into the plan, whereas with the SEP IRA, you're limited to that 20% or 25% figure.

With a SIMPLE IRA, like the Solo 401k, you're wearing two hats — the employer hat and the employee hat. As an employee, you can contribute these amounts, and as the employer, you can match one, two, or three percent of your income. Let’s say you’re paying yourself $100,000 and you’re 50 or older, you can put $16,500 into the plan, and then match one, two, or three percent. If you do the maximum match of three percent, that’s an additional $3,000, giving you a total of $19,500 into your SIMPLE IRA. So, you can contribute higher amounts than an IRA, which is capped at $6,000 or $7,000.

This is a tax-deductible plan, so you get a tax deduction. On the con side, the $19,500 limit is lower than what you can contribute to a SEP IRA, but only by a $500 margin, and certainly a lot less than the Solo 401k. However, the advantage of the SIMPLE IRA is that you can have employees, and they can also benefit from the plan. The match you make as an employer is also tax-deductible for the business.