Reading time: 2 minutes
Retirement plans can be a great benefit to businesses. Beyond attraction and retention of employees, offering a retirement plan gives your business access to significant tax deductions. A SIMPLE IRA is often a good retirement plan option for small businesses. This year the deadline for setting up a SIMPLE IRA is October 1, 2018. It is important to weigh your options and decide soon if a SIMPLE IRA is the best retirement plan for your business.
SIMPLE IRA defined
SIMPLE stands for “savings incentive match plan for employees.” These plans, as the name suggests, are simple to set up and administer. SIMPLE IRAs do not call for annual filings or discrimination testing as traditional IRA and 401(k) plans require.
Businesses with fewer than 100 employees qualify for SIMPLE IRAs. Employees have the option to contribute; employers’ contributions are mandated. The contributions are pre-tax, and accounts can grow tax-deferred just like a traditional IRA or 401(k) plan, with distributions taken in retirement.
There are two contribution options an employer can choose from:
- Make a “nonelective” contribution equal to 2% of compensation for all eligible employees. This requires that a contribution is made by the employer regardless of employee contribution. The applies for compensation up to the annual limit of $275,000 for 2018 (annually adjusted for inflation).
- Match employee contributions up to 3% of compensation. In this instance, the employer only contributes if the employee does. The annual compensation limit does not apply here.
Employees are immediately 100% vested in all SIMPLE IRA contributions.
Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put in a SIMPLE IRA.
SIMPLE IRAs have lower limits than 401(k)s and offer greater income deferral opportunities than regular IRAs. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018. Employees age 50 or older can make a catch-up contribution of up to $3,000. Ordinary IRAs allow employees to contribute up to $5,000, and catch up contributions for up to $1000, while 401(k) plans have a contribution limit of $18,500, and a $6,000 catch up contribution limit, as of 2018.
Weigh Your Options
There are also several retirement plans that may suit your small business. Traditional 401(k) plans are a common option. A Simplified Employee Pension or a defined-benefit pension plan are others. These two plans do not allow employee contributions and include other pros and cons. One of the biggest advantages of a SIMPLE IRA is that it is easy to maintain and set up. Remember that the deadline for setting up a SIMPLE IRA this year is October 1, 2018, so deciding on a company retirement plan soon is best. If you are interested in learning more about SIMPLE IRAs and other retirement plan options, contact us at 949-860-9902 or click here, and we will contact you.