Money Matters – Skloff Financial Group Question of the Month – June 1, 2015
SIMPLE IRA – The Powerful Small and Middle Sized Business Retirement Plan
Q: We own a middle sized business and want to retain our employees by offering a valuable retirement benefit. We read your article on SEP IRAs. Is there another low cost, low maintenance retirement plan with generous contribution limits?
A: The Problem — Finding a Low Cost and Low Maintenance Retirement Plan with Generous Contributions Limits for Small and Middle Sized Businesses
Many employer sponsored retirement plans require annual testing and annual tax filings. The testing, preparation and filings can be time consuming and costly. Furthermore, many employer sponsored retirement plans have modest contribution limits.
The Solution —SIMPLE IRA
Savings Investment Match Plan for Employees (SIMPLE IRAs) provide self-employed individuals and small and middle sized businesses a low cost, low maintenance employer sponsored retirement plan with generous contributions limits and no employer tax filings.
Who Can Establish a SIMPLE IRA and Who Can Contribute. It can be established by sole proprietors, partnerships, C corporations and S corporations. SIMPLE IRAs are limited to businesses with 100 or fewer employees who earned at least $5,000 in the preceding year. Even if employees are also employees of another company or university where they participate in their retirement plan (e.g.: 401(k) Plans or 403(b) and/or 457(b)), they can also participate in a SIMPLE IRA. Contributions can be made by employees and employers.
Contribution Limits. Employees can contribute up to 100% of their salary, up to a $12,500 per year ($15,500 if age 50 or over). Employers are required to either match employee contributions 100% of the first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years) or contribute 2% of each eligible employee’s compensation (with a $250,000 maximum compensation limit). Translation: even if an employee earns $1 million the employer cannot contribute more than $5,000 for 2015.
Vesting. With many employer sponsored retirement plans employer contributions can be taken back by the employer if employees do not remain employed by the employer for a certain number of years. After remaining with the employer for a number of years (five years as an example) employees can keep the employer’s contributions whether or not they stay with the employer. The process of being able to keep employer contributions over time is called vesting. With a SIMPLE IRA, employer contributions are immediately vested.
Establishment Deadline. The deadline to establish a SIMPLE IRA for 2015 is October 1, 2015.
Withdrawals. Withdrawals can be taken at any time, but are subject to 10% early withdrawal penalties (25% for first two years of plan participation) if taken before the age of 59 ½. Like many retirement plans, SIMPLE IRAs are subject to required minimum distributions (RMDs) starting at age 70 ½.
Tax Domino Effect. Contributions to a SIMPLE IRA reduce your adjusted gross income (AGI). This can have a positive domino effect, avoiding or reducing: capital gains and dividend taxes, net investment income taxes and itemized deductions and personal exemptions phaseouts (PEP).
Action Step — Establish a SIMPLE IRA
Offering a SIMPLE IRA retirement plan allows employees and business owners to boost their retirement savings and gain tax benefits as you close your retirement savings gap. Don’t put off until tomorrow what you can do today.
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm specializing in financial planning, investment management and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.