SIMPLE IRAs: A Retirement Savings Plan for Small Businesses
SIMPLE IRAs, or Savings Incentive Match Plans for Employees IRAs, are a type of retirement savings plan designed for small businesses. With the guidance and knowledge of a Dixon Financial Group, LLC advisor, it is relatively simple to set up and administer. Simple IRAs offer several advantages for both employers and employees.
Employees of small businesses with SIMPLE IRA plans can contribute up to $15,500 in 2023 and, if over the age of 50, can make a catch-up contribution of $3,500 for a total of $19,000. This amount comes from the salary reduction contributions made from an employee's paycheck before taxes are withheld. Employers can also make matching contributions to their employees' SIMPLE IRAs. All employees of a SIMPLE IRA-eligible employer are eligible to participate in the plan, regardless of age or years of service. There could be exceptions, as the employee must receive at least $5,000 (or a lower amount set by the employer) in compensation from the employer in any two years prior to 2023 and be reasonably expected to earn at least $5,000 (or a lower amount set by the employer) in the current year.
Employers can match employee contributions up to a certain percentage of pay. For example, an employer might match 50% of employee contributions up to 3% of pay, which means that if an employee contributes 6% of salary to the plan, the employer would make a matching contribution of 3%.
There are two types of matching contributions that employers can make:
- Elective matching contributions: Employers make matching contributions on a dollar-for-dollar basis up to a certain percentage of employee contributions.
- Nonelective matching contributions: Employers make a 2% contribution to each employee's SIMPLE IRA, regardless of whether the employee makes any contributions.
Suppose an employee participates in any other employer-sponsored retirement plan during the year. In that case, the total salary reduction contributions they can make to all their plans is limited to $22,500 if they are under age 50 and $30,000 if 50 and over.
SIMPLE IRAs offer many benefits for both employers and employees, including:
- Tax benefits: Contributions to SIMPLE IRAs are tax-deductible for employees, and the money in the accounts grows tax-deferred until distributions are taken in retirement.
- Starting in 2023: Employers are now able to offer Roth SIMPLE IRAs alongside Traditional SIMPLE IRAs
- Employer matching contributions: Employers can make matching contributions to SIMPLE IRAs, which can help employees save more for retirement.
- Flexibility: SIMPLE IRAs offer several investment options, so employees can choose investments that meet their individual needs.
- Simplicity: SIMPLE IRAs are relatively simple to set up and administer, so working with our DFG advisors can help save employers time and money.
SIMPLE IRAs are a good option for small businesses that want to offer their employees a retirement savings plan. They offer many advantages for employers and employees, including tax benefits, employer-matching contributions, and simple administration.
If you are an employee of a small business with a SIMPLE IRA plan, be sure to take advantage of the opportunity to save for retirement. Even small contributions can make a big difference over time.
As a business owner, you will be confident that the Dixon Financial Group, LLC advisors have you, your company and your employees' best interest. Please consult with our advisors when you are ready to learn more about retirement fund options for your employees or if you are an employee and need to know how to start your retirement savings journey.
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David S. Dixon, CFP®
Jacob S. Bierstedt, CFP®, ChFC
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