Your question: Are contributions to a SIMPLE IRA tax-deductible?

Answer:

Yes. Employee contributions are made pre-tax, lowering taxable income. Employer contributions are deductible as a business expense. Investment earnings within the account grow tax-deferred until withdrawn in retirement.

Explore other related topics below

  • Are there annual IRS filings or administrative burdens?

    No. One of the main advantages of a SIMPLE IRA is its minimal administration. Employers are not required to file Form 5500 or conduct nondiscrimination testing. However, they must provide employees with annual notices regarding eligibility, contribution limits, and plan features.

  • Is there a Roth option for SIMPLE IRAs?

    Currently, most SIMPLE IRAs are pre-tax only, though some recent legislation may allow Roth contributions in the future depending on custodial support. We can help you assess available plan providers and whether a Roth SIMPLE IRA is feasible for your business.

  • Can a SIMPLE IRA be rolled over into another retirement account?

    Yes, but with restrictions. During the first two years of participation, rollovers are only allowed to another SIMPLE IRA. After two years, participants may roll over funds to a traditional IRA or another qualified plan. Improper rollovers may trigger penalties and taxes.

  • When can employees withdraw money from their SIMPLE IRA?

    Employees may withdraw funds at any time. However, withdrawals before age 59ยฝ are subject to ordinary income tax and a 10% penalty. If the withdrawal occurs within the first two years of participation, the penalty increases to 25%. Required Minimum Distributions (RMDs) begin at age 72.

  • Are employer contributions required?

    Yes. Employers must make one of the following contributions each year: A dollar-for-dollar match of employee contributions up to 3% of compensation, or A 2% non-elective contribution for all eligible employees, whether they contribute or not. The employer must choose one method and apply it consistently for the year.

  • How much can employees contribute?

    Employees can contribute up to the annual salary deferral limit set by the IRS. Participants age 50 and older can also make catch-up contributions. These amounts are adjusted annually. Contributions are deducted directly from the employeeโ€™s paycheck.

  • Who is eligible to participate in a SIMPLE IRA?

    Employees who have earned at least $5,000 in any two prior years and are expected to earn at least $5,000 in the current year must be eligible to participate. Employers can choose to allow more generous participation but cannot set more restrictive eligibility rules. ฦ’

  • Who is eligible to set up a SIMPLE IRA?

    Any business with 100 or fewer employees who earned at least $5,000 in compensation in the preceding calendar year may establish a SIMPLE IRA. The business must not offer any other retirement plan concurrently. Itโ€™s an excellent option for businesses seeking a low-cost, easy-to-administer retirement benefit.

  • What is a SIMPLE IRA?

    A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan designed for small businesses with 100 or fewer employees. It allows employees to make salary deferral contributions while requiring the employer to make annual contributions, either as a matching percentage or a fixed amount.