A simple IRA, also known as a savings incentive match plan for employees IRA, is a specific retirement plan utilized by businesses with 100 or fewer employees. The process of setting up a simple IRA is easier and cheaper for a small business, but it has more limitations on how much you can save than a traditional 401(k) plan used by larger companies.
For both 2017 and 2018, the annual contribution amount caps at $12,500. Workers who are 50 or older can also make $3,000 in catch-up contributions for an overall total of $15,500. Workers younger than 50 can put $18,500 in a traditional 401(k) for 2018.
Contributing to a simple IRA lowers your taxable income because the contributions are made pretax. The funds remain free from taxes until you decide to withdraw it. When you do, it is taxed as if it were regular income. If you choose to pull money out before you reach age 59 ½, you’ll have to pay taxes on the money and play a 10 percent early-withdrawal penalty. This amount skyrockets to 25 percent if the money is taken out less than two years after the plan was established.
A simple IRA differs from other retirement plans that include an option for Roth. This option allows employees to also invest their after-tax income to eliminate taxation later on in life when the funds are taken out. A simple IRA does not give this option to participants.
Employers are required to make some contribution to an employee’s simple IRA account. The amount can be a dollar-for-dollar match for a maximum of three percent of the employee’s pay, or a flat two percent, even if the employee doesn’t contribute. Ronald Oldano, a financial planner and wealth adviser based out of Orlando FL, notes that most employers choose to do a dollar-for-dollar match instead of the flat two percent contribution. Employers are also eligible to lower the match during a five-year period during periods of financial slowdown.
If your employer is currently matching three percent, ensure that you are contributing at least enough to get the full match on your simple IRA. It’s free money so take advantage of it. Choose your investments wisely and select a combination that meets your long-term goals affordably.
Building up your retirement with a Simple IRA
If you’re already meeting the maximum contribution amounts for your simple IRA, open your mind to the option of opening a traditional or Roth IRA. Individuals younger than 50 can contribute a maximum of $5,500 to a traditional IRA, while those age 50 or older can make an additional $1,000 contribution to catch up. You must meet income requirements to get a Roth IRA, with a phase-out at $120,000 for singles and $189,000 for married couples. Contributions to your traditional IRA are tax-deductible if your income is no more than $63,000 if filing single or $101,000 if filing jointly. Roth IRA contributions are not tax-deductible.