If you have a SIMPLE IRA Plan, then you know that it allows employers and employees to contribute to a traditional IRA account intended for employees. It’s also known as a Savings Incentive Match Plan (Employees). This account is also a type of IRA or retirement account that can be self-directed. Self-directed means that you have more control over the types of investments made through the plan, which go beyond the ordinary (stocks, mutual funds, and bonds).
Small businesses with fewer than 100 employees are usually the ones who offer the SIMPLE IRA Plan, either by adopting a SIMPLE Form (5304 or 5305), prototype, or individually designed plan documentation. The employer who offers this kind of plan cannot have any other type of retirement. Also, the employer has no filing requirements.
Each year’s contributions are either matching (up to 3% of compensation) or 2% non-elective contribution for an eligible employee. With the matching contribution plan, the 3% of compensation is not limited by the annual limit.
Under the non-elective formula, even if the eligible employee cannot contribute, that employee must still receive the employer’s contribution equal to 2% of the compensation up to the annual limit, which was $285,000 in 2020 and is currently present $290,000 in 2021. Cost-of-living adjustments are expected in later years.
SIMPLE IRA Plan for Different Circumstances
This article is only an overview of a SIMPLE IRA Plan under typical circumstances. There may be variations, including the self-directed option. Traditional investment assets are not sufficient enough for everyone. When planning for retirement, many people want to have more say in what investments the money in their accounts is used for. Certain types of real estate, cryptocurrency, Forex trading, and futures are just some examples of investments one can make with a self-directed account.
With a SIMPLE IRA self-directed plan, you cannot transfer funds to other types of retirement plans, such as IRA, Roth, or SEP. Distributions are included in the annual income and are therefore subject to income tax. In addition, there may be a 10% early withdrawal penalty for individuals under the age of 59.5. However, exceptions can be made, such as having inherited the IRA, paying education expenses (qualified) for either the account holder or dependents and first-time home buyers.
Regardless of what kinds of investments you are interested in, be sure and speak to your financial advisors about establishing a SIMPLE IRA Plan. If you want more control over the investments, take advantage of simplified transfers to a self-directed account, such as those offered by Rocket Dollar.