SIMPLE IRA

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What to know about SIMPLE IRAs

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a tax-advantaged retirement plan for small and growing businesses. A SIMPLE IRA is available to any business that is a sole proprietorship, partnership, corporation, or tax-exempt organization; employs 100 or fewer employees who each received at least $5,000 in compensation from the company during the previous year; and does not currently maintain another company-sponsored retirement plan.

Advantages

SIMPLE IRAs allow you to provide a retirement program for yourself and your employees while minimizing the administrative expenses, government reporting requirements, and complexity associated with other types of retirement plans.

There are advantages for both employers and employees:

  • Employer contributions to a SIMPLE IRA are considered a business expense and are tax-deductible for the business.
  • Employee contributions reduce their taxable income by the amount of their salary deferral, and earnings grow tax-deferred. Employees do not pay taxes on contributions until they begin to withdraw money from the plan.

Contributions

A SIMPLE IRA is funded through a combination of employee and employer contributions. Employers are required to make annual contributions and must notify all eligible employees by November 1 which contribution method will be used the following year.

Employer contributions are required in one of two methods

Method 1: Up to a 3% matching contribution

  • Employers match each eligible employee's contribution, dollar for dollar, up to 3% of his or her annual compensation.
  • A match between 1% and 3% of total compensation may be elected in any two years in a five-year period.

Method 2: A 2% nonelective contribution:

  • Employers contribute 2% of each eligible employee's compensation subject to compensation limits. If you choose this option, you will need to make a contribution for all eligible employees, whether or not they elect to contribute to the plan.

Contribution limits

These limits can change each year as defined by the IRS. Please visit the IRS website for details.

Deadline considerations

  • Employers must establish new plans by October 1 of the first plan year.
  • Salary deferrals must be deposited within 30 days after the end of the month in which the amount would otherwise have been payable to the employees in cash.
  • Employer contributions may be made through the business’ tax filing due date, including extensions.

Withdrawals

Withdrawals by employees can begin as early as age 59½ and must begin by age 73. Taxes are payable on distributions when they are withdrawn. For early withdrawals by individuals under age 59½, the IRS imposes a 25% penalty if a distribution is taken within the first two years of participating in the plan. After two years, the penalty for anyone under age 59½ who takes a distribution is 10%, except under certain circumstances. Those exceptions include:

  • Medical expenses in excess of 7.5% of adjusted gross income
  • Health insurance premium payments if unemployed for 12 consecutive weeks
  • Qualifying higher-education expenses
  • Qualifying first-time home purchase ($10,000 lifetime limit)
  • Qualified birth or adoption ($5,000 limit per birth or adoption)
  • Qualified military reservist
  • Substantially equal payments made over life expectancy
  • Death
  • Disability

If you wish to establish a new plan using Allspring mutual funds, please work with your financial advisor.

Any tax or legal information on this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations.

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