Simplifying the SIMPLE IRA

Personal Money Planning |

By Michelle Kuehner

Most individuals have heard of Traditional and Roth IRAs, but not many have heard of their cousin, the SIMPLE IRA. Individuals who are self-employed or own small businesses can take advantage of these accounts.

Finding and keeping talented employees is a common challenge for business owners. By providing employees with benefits and incentives, like employer-sponsored retirement plans, companies may attract a more talented workforce. However, a popular option like a 401(k) plan could end up being too expensive for smaller businesses.  Plans that fall under the oversight of the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for private sector retirement and health plans, require extensive testing and oversight, and may result in significant costs.

To assist in providing coverage for this retirement savings gap, a competitive alternative was established in 1996 called the SIMPLE IRA. The SIMPLE offers a lower-limit alternative to the 401(k) plan, but with limits far exceeding those of the Traditional and Roth IRAs.

Companies can save money on plan administration costs and have a user-friendly alternative that enables employees to start saving for retirement on their own. Companies with no more than 100 employees can take advantage of a SIMPLE plan if each employee who participates earned $5,000 or more from the company in the previous year. 

When it comes to employer-sponsored retirement plans, the SIMPLE is among the easiest to establish. Employers can establish a plan using one of two standardized forms provided by the IRS: Form 5304 SIMPLE or Form 5305-SIMPLE. A SIMPLE IRA account, which can be opened at most financial institutions, is mandatory for all participating employees.   

Employees and their employers may contribute to the SIMPLE IRA. Employees can contribute up to the annual limit through salary deductions, and their employers will match up to 3% of that amount. Alternatively, the company can contribute 2% for all qualified employees regardless of their decision to participate. Funds in these plans may be invested, much like a 401(k), but usually with more investment options.

For 2024, the IRS has announced an increase of the maximum contribution limit to $16,000. The catch-up allowance of $3,500 for those over 50 years old will remain the same. This means a person over 50 years can contribute a total of $19,500.

The big news is that a 10% increase over the $16,000/$3,500 limits will also be available starting in 2024 to businesses with 25 or fewer employees. Hence, some may be eligible to contribute $17,600, plus the additional $3,850 catch-up (for a grand total of $21,450). Organizations with 26-100 employees can also qualify for the extra 10% benefit (with a caveat, of course, which I won’t bore you with now).

Additionally, starting in 2024, employers can make an extra contribution to SIMPLE IRAs of all employees making at least $5,000. This extra payment is limited to $5,000 or 10% of the employee’s salary.

Those interested in contributing more money will be happy to learn of these increased limits. However, it appears that the seemingly SIMPLE IRA is no longer quite as simple.