Simple IRA: 10 Valuable Benefits

6 minutes

What the heck is a Simple IRA?

Picture courtesy of nextgenerationtrust.com
Picture courtesy of nextgenerationtrust.com

The SIMPLE IRA is an acronym for Savings Incentive Match Plan for Employees. This plan allows employees and employers to contribute to a Traditional IRA which is set up for employees.

The ideal use of the SIMPLE IRA is for start-up retirement savings plans for small employers not currently offering any sort of retirement plan.

I’ve touched on these statistics before but did you know that:

  • the average 50-year-old only has $42,797 saved.
  • 45% of Americans having nothing saved.
  • 38% don’t actively save for retirement at all.
  • 20% of Americans tap into their 401k savings early, either thru a loan or early withdrawal
  • 80% believe they will not have enough savings when they retire.

These numbers scare the crap out of me and that is why we are here talking about this subject.

If I can make the difference with just one person my mission will be complete.

This is why we are talking about all the different retirement plans out there so you have some ideas of which would be the best fit for you. And how they could help you.

Benefits of a SIMPLE IRA

1. Very easy to setup.

A Simple IRA is very easy to setup and is ideal for the small business that wants to offer a retirement plan for their employees.

There are no start-up costs and no operating costs of a conventional retirement plan.

It is available to any small business with less than 100 employees. And it is easily established by filling out a few forms. These forms are available at IRS.gov.

There are no filing requirements for the employer, but keep in mind that they may not have any other retirement plan currently setup.

Any brokerage house can fulfill this need for you. You simply contact whoever you would like to have to manage your plan for you and they will help you with the setup. This is definitely in their best interest because they will want your business.

2. The employer is required to match contributions.

The employer is required to match up to 3% of your compensation. Or 2% if you did not elect to contribute to the plan.

This means that you could start saving at least 6% a year towards your retirement! Awesome.

It also means that if you decide not to contribute that your employer will have to contribute 2% a year for you, based on your compensation.

Another plus is that you are always 100% vested, which means that your money is always yours if you decide to leave the company for any reason.

3. Unlimited investment choices for you SIMPLE IRA.

This means you can put your money pretty much wherever you would like.

If you want to invest in stocks, bonds, mutual funds, ETFs, real estate, money market funds and even some coins.

This gives you the flexibility to choose any sort of mixture of different investments and asset classes.

This is a big plus over the retirement plans that you get with larger employers as these are typically limited to options of mutual funds or index funds.

So if you are dying to buy some Apple stock you can right ahead and invest in them for your retirement. Or if you want to buy Coke or Berkshire Hathaway you can. Pretty neat huh?

4. Your money earns interest tax-deferred.

During the life of your investments in a SIMPLE IRA, the money will have the added benefit of earning interest tax-deferred.

This means that you get the added benefit of growing your retirement nest egg during the time you have the money invested.

Because this is tax-deferred money you will grow your savings, but you need to remember that when it comes time for distributions you will be required to give Uncle Sam his cut.

The SIMPLE IRA is treated like a Traditional IRA in that it is before tax money which gives you a boost in the amount of money you can invest. It also means that you will have to account for taxes during your retirement.

It also means that when you reach the age of 70 1/2 you will have to start taking RMDs or required minimum distributions at that time. Keep in mind that your tax rate at this time will be based on your current income, not the income you were making when the contributions were made.

Which in most cases is lower than your working years. This will lower your tax burden on these monies. Also, you will not be taxed on the interest earned but you would be taxed on the original contributions.

5. You will save money on your taxes.

Because all contributions to a SIMPLE IRA are treated like a Traditional IRA. All of your monies will be deducted from your current income. This will reduce your current income which in turn will lower your taxes paid.

Again remember that when you retire and start taking distributions that you will have to pay taxes on those original contributions.

The added benefit of all this will be that it will lower your tax burden during your working years which will give you more money to do as you need.

Either paying down current debt, setting aside money for an emergency fund or possibly investing more money.

6. Instant Vesting

What the heck is vesting? This means that your money is your money. Or in other words that the money that you contribute as well as the matching portion from your employer is yours.

So if you leave your company at any point that money is yours to take with you.

Unlike most 401k with larger companies typically you will see some sort of graded plan. This means that you may have to work for the company before you are fully vested.

So if you don’t work that required time frame, when you leave part or all of that money would not be able to go with you.

This refers only to any money that was part of a matching or revenue-sharing benefit that the employer may offer. This is done to entice employees to consider staying with their current company.

8. You have pretty high contribution limits.

Currently, the limits for 2016 are $12,500 and with a catch-up limit of $3000 if you are over 50 years old.

Now this is not as high as a current 401k with a larger employer but it is double the range if you opened a Traditional on your own and contributed. The current limits for a Traditional are $6500.

Plus you still have all the investment choices that you would with a Traditional IRA.

9. You can contribute to a Roth IRA while contributing to a SIMPLE IRA

This means that you can contribute more money to your retirement if you wish. You will be able to contribute $6500 a year to your Roth, which has different added benefits that we discussed earlier here.

However there a few things to keep in mind when you are looking at opening up a Roth IRA.

First that your income falls within the threshold for you to be able to contribute to a Roth. This calculation is called the MAGI, which stands for modified adjusted gross income.

If your income falls within the limits of the MAGI and your tax filing status is in the range then you can contribute to a Roth.

This allows you to invest more money if you wish and give you added tax benefits during your retirement.

10. You can opt out of contributing.

If for any reason you wish to opt out of your contributions you have the ability to do so.

But the great thing is that your employer will still have to make contributions for you. This would be based on your current income and they would have until tax-filing time to make their contributions.

You would still have choices on what you would like to invest in. But it also gives you the ability to have money contributed towards your retirement even if you weren’t able to.

This option would be available if your plan was set up so that the employer would be making up to 2% contributions whether you contributed or not. If the employer chose to do a dollar-for-dollar match then this option would not be available to you.

In Conclusion

So we tried to answer some of the questions you might have about a SIMPLE IRA. We also talked about some of the many benefits of the SIMPLE.

Among the many things to keep in mind with this plan is that it is very flexible in that it allows you to invest in pretty much anything you would like.

It also provides some tax relief for current income as well as providing tax benefits when you retire. Because the plan is treated like a Traditional IRA you have the ability to open an additional Roth to help you save more money. Of course, providing you meet the income requirements.

Another benefit of the SIMPLE is the ease of setup for employers. There are very few documents needed and it is easy to maintain. This also provides a terrific benefit to your employees plus helping society by giving more people the opportunity to save for their retirement. Which can help ease the burden of another person eating at the trough, so to speak.

Bottom line is that the SIMPLE IRA is another great vehicle that you can utilize to help you towards the goal of being able to retire comfortably. It also is a wonderful benefit some small companies could offer to their employees, which will help them in their goal of savings as well as give them another reason to continue working for you.

If you enjoyed this post please take a moment to share it with someone you think it might help. I would greatly appreciate it.

Until next time. Take care and be well.

 

 

 

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