A Better Retirement Plan for a Small Business – SIMPLE IRA

What is a SIMPLE IRA?

Answer: SIMPLE stands for Saving Incentive Match Plan for Employees of Small Employers. The plan provides both you and your employees an easy way to save for retirement. Everyone wins here. Your small business gets a tax deduction, and your employees can save on a tax-deferred basis through payroll deductions.

Any business type is eligible as long as have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year) and don’t offer any other retirement plan.

No More Excuses, All Small Businesses Should Offer Their Employees a Retirement Plan!

If you don’t offer a retirement, how do you expect to keep your quality employees? Think of the time and the cost involved in the hiring process. Establishing a retirement plan is “SIMPLE” and benefits both you and your employees. Below is all you need to know.

No ExcusesTop excuses…

  1. A retirement plan is too expensive for my small business.
  2. I am too busy, and a retirement plan is way too complicated to set up.
  3. I have to deal with a pushy broker who doesn’t have my best interest in mind.


  1. A SIMPLE IRA plan can be established for no additional cost/fees to the business.
  2. The paperwork is only three pages long, and most financial companies will help you fill them out.
  3. You can skip the pushy broker and call a no-load mutual fund company like Fidelity, T. Rowe Price, or Vanguard and ask to speak with a small business retirement specialist. They can help you as the business owner with the plan setup and also will guide your employee through their investment options.

Disclosure: I am a former employee of T. Rowe Price. My opinions are my own and have no financial ties to the company.

Numbers from the Small Business Administration (SBA):

About 50% of Americans work for small businesses. I support #local #Smallbiz! Click To Tweet Only 31% of small businesses provide #retirement plans. This needs to change! Click To Tweet Roughly 77 million Americans don’t have employer #retirement plans. Stop the madness! Click To Tweet

How Does a SIMPLE IRA Work?

working for retirementExample: Tara works for a small business with 15 employees. The business has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s compensation. Under this option, if an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution.

Tara has a yearly compensation of $48,000 and contributes 5% of her compensation ($2,400) to her SIMPLE IRA. The company matching contribution is $1,440 (3% of $48,000). Therefore, the total retirement contribution to Tara’s SIMPLE IRA that year is $3,840 (her $2,400 contribution plus company’s $1,440 contribution). The financial institution holding Tara’s SIMPLE IRA has several investment choices, and she is free to choose which ones that suit her best.

Note retirement planningHelpful note: There is an alternative option for employers to choose a 2% non-elective contribution, where all eligible employee receives an employer contribution equal to 2% of their compensation (index yearly), regardless of whether they decide to participate in the plan.

What are the annual contribution limits?

Answer: Employee salary reduction contributions or sometimes called elective deferrals are limited to $12,500 in 2016 and are subject to annual cost of living adjustment see IRS.gov/cola_table. Additionally, anyone 50 or over can make an extra $3,000 “catch-up” contribution each year.

SIMPLE IRA TipsBonus tip: If you (age 52) have a side business which for example generates less than $15,000 in net income you could potentially make a SIMPLE IRA contribution/deduction which would eliminate most or all of the income tax owed from the side business. Not too shabby! As always make sure you consult with a qualified tax professional to review your specific situation.

Is there a deadline to establish a SIMPLE IRA?

Answer: You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year. The October 1st deadline allows for the employee to have a 60-day enrollment and still be able to contribute from the payroll checks in December.

Note retirement planningHelpful note: This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.

Are there any additional things I need to do for my employees?

Answer: Yes, but it is not complicated. There are two key disclosure documents (summary description and annual election notification) that keeps participants informed about the basics of how the plan operates, inform them of changes in the plan’s structure and operation, and provides them a chance to make decisions and take timely action about their accounts. These documents are included in the plan paper and become a basic handout for your employees each year.

SIMPLE IRA TipsBonus tip: There are special withdrawal rules with the SIMPLE IRA. Withdrawals are taxable in the year received and if the employee is younger than 59 ½ there is a 10% penalty tax. Also, if the withdrawal occurs during the first 2 years of participation the 10% tax is increased to 25%, see IRS Pub 560 or 590b. This is designed to encourage the employee to keep the retirement nest egg intact (retirement planning 101) until they reach retirement age.

Ask yourself…Simple Questions

– What is stopping me from offering a retirement plan? or

– Would you advise your son or daughter to take a job without a retirement plan?


Steps to get started with retirement planIt is time to take action!

  1. Call your preferred financial company. I would lean toward the big non-load mutual companies (Fidelity, T. Rowe Price or Vanguard). Have the plan paperwork already downloaded from their site so you can get your questions answer in just one phone call.
  2. Fill out the investment paper work for your account under the plan. It is important to remember as owner of the business this retirement plan is for you also!
  3. Notify your employees once you get confirmation from the financial company your plan has been established (you will get your signed plan documents back).
  4. Contact your payroll company to set up the salary reduction contributions for the employees and that is it!

Bonus Resources:

Take the first step by Mark Twain

 “The secret to getting started is breaking tasks into small manageable steps and starting on the first one.”Mark Twain


If you aren’t sure that the SIMPLE plan is right for your business feel free to check out my blog post on a SEP IRA for a Small Business. For retirement plan consulting (I can walk you through this process step by step) just contact me.

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