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Seeking Simplicity: Understanding SIMPLE IRAs and SIMPLE 401(k)s

Seeking Simplicity: Understanding SIMPLE IRAs and SIMPLE 401(k)s

June 30, 2022
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For those who don't have a 401(k) option through their employer—which includes some small-business owners—how to save for retirement might be challenging. In a competitive employment market, offering retirement options to new hires and existing employees may help you remain competitive and attract top talent. 

Consider these retirement simplicity plans: The SIMPLE 401(k) and the SIMPLE individual retirement account (IRA). Here are some details about these types of retirement accounts and how they may benefit you.

What is a SIMPLE IRA?

The SIMPLE IRA (or "Savings Incentive Match PLan for Employees") allows both employers and employees to contribute to traditional IRAs for retirement.

Some beneficial features of the SIMPLE IRA include:

  • Fairly easy to establish.
  • Available to all businesses of 100 employees or less.
  • Might be suitable for employers who have no other employer-sponsored retirement plan.
  • No employer filing requirements.
  • No startup or operating costs.
  • Employees are always 100% vested in all SIMPLE IRA assets held in their name.

Under a simple IRA plan, the employer must make certain contributions to each employee's SIMPLE IRA each year.

These contributions must be one of these options:

  • A 2% non-elective contribution for all eligible employees; or
  • A matching contribution of up to 3% of each employee's compensation.

Setting up a SIMPLE IRA takes three steps. First, an employer must execute a written agreement to provide SIMPLE IRA benefits to all eligible employees. Second, an employer must provide employees with information about this written agreement and a copy of it. Third, after getting the necessary account information from employees, the employer may set up an IRA account for each employee.

If an employee leaves, their SIMPLE IRA goes with them.

What is a SIMPLE 401(k)?

Like SIMPLE IRAs, the SIMPLE 401(k) is for small businesses with fewer than 100 employees.If you exceed this threshold, do not worry—there is a two-year grace period that allows you to exceed this threshold before switching to another retirement plan offering.

Like SIMPLE IRAs, under a SIMPLE 401(k) plan, the employer must make contributions that must be one of these options:

  • A 2% non-elective contribution for all eligible employees; or
  • A matching contribution of up to 3% of each employee's compensation.

No other employer contributions are allowed. However, employees are free to defer as much of their income up to the annual contribution limit for employees. Employees are always vested in all contributions.

The employee contribution limits in 2022 are that an employee under the age of 50 may contribute up to $14,000 to a SIMPLE 401(k). Those who are age 50 and older may contribute up to $17,000. This number does not include any employer contribution to the plan.

Some benefits of the SIMPLE 401(k) include:

  • There are no non-discrimination rules, which might prevent highly compensated employees from being able to contribute.
  • Plan administration is easy to understand and implement.
  • There is the ability for plan participants to take 401(k) loans or make hardship withdrawals.

Both SIMPLE IRAs and SIMPLE 401(k)s might allow small businesses to establish retirement plans without the hassle, expense, and administrative burden of many traditional 401(k) programs.

Footnotes

SIMPLE IRA Plan, irs.gov,
https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan

SIMPLE 401 (k) Plan, irs.gov
https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-401k-plan

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any ERISA product or individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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