Simple IRA's


What Is A Simple IRA?

A Simple IRA plan lets your employees defer up to $12,500 of compensation in 2018 ($15,500 if age 50 or older). You promise to match employee contributions dollar for dollar up to 3% of pay, or to make a "nonelective" contribution for all eligible employees, whether or not they contribute, equal to 2% of pay. (The 3% of pay match may be reduced to as little as 1% in any two of five years. And no more than $275,000 of an employee's pay can be taken into account when determining contributions in 2018.)


How do I set up a SIMPLE IRA plan?

You can adopt a SIMPLE IRA plan for 2018 only if you had 100 or fewer employees in 2017 (excluding employees who earned less than $5,000), and you don't contribute to any other retirement plan. If your business qualifies, follow these three simple steps to set up your SIMPLE IRA plan (you have until October 1 to set up a new SIMPLE IRA plan for 2018).


Step 1: Adopt a written plan document

You can set up a SIMPLE IRA plan by completing either a pre-approved document provided by a financial institution (for example, a mutual fund company, insurance company, or bank) or an IRS model document (either Form 5305-SIMPLE or Form 5304-SIMPLE).


Form 5305-SIMPLE lets you specify the "designated financial institution" that will both act as your plan's trustee/custodian and initially receive all plan contributions. Form 5304-SIMPLE, on the other hand, lets each eligible employee select the financial institution that will serve as trustee/custodian and receive all plan contributions.

Step 2: Provide information to your employees

You must provide your eligible employees with the following information before the beginning of each election period:

  • An explanation of the employees' ability to make or change salary reduction elections
  • Whether you'll make matching contributions or nonelective contributions for the coming year
  • A summary description of the plan
  • If you use a designated financial institution, a notice that employees can transfer their account balances to an IRA provider of their choice without cost or penalty

The election period is generally the 60-day period prior to the start of each calendar year (November 2 to December 31). However, the election period will be different if you set up a SIMPLE plan mid-year, or if an employee first becomes eligible after the 60-day period ends. Forms 5304 and 5305 contain most of the documents you'll need to comply with these notice requirements.

Step 3: Set up employee accounts

A SIMPLE IRA account must be set up by or for each eligible employee, and all contributions to the plan must go into these accounts. In general, you must include all employees who've earned at least $5,000 (from you) during any two preceding years (whether or not consecutive) and who are expected to earn at least $5,000 in the current year.

What are some advantages of a SIMPLE IRA plan?


  • SIMPLE IRA plans are not required to follow certain Internal Revenue Code rules that prohibit discrimination in favor of higher-paid workers. Therefore, even if no employees want to contribute, you can establish a plan, contribute on your own behalf, and provide an employer matching contribution.
  • You aren't required to file reports with the government — only the financial institution holding the IRAs is required to file reports.
  • Once your employees exercise control over the assets in their accounts, you are relieved of any fiduciary responsibility.
  • Employer contributions can be flexible. You can decide each year whether you want to provide a matching contribution or a nonelective contribution.
  • The plan requires minimal paperwork.
  • Your business can deduct contributions made to a SIMPLE IRA, whether you're making contributions for only yourself, or for yourself and your employees.
  • The dollars invested are pre-tax dollars and accrue tax deferred. That means that your employees can exclude the contributions from their gross income.
  • Income-tax-free rollovers or direct trustee-to-trustee transfers can be made from one SIMPLE IRA to another SIMPLE IRA at any time. A tax-free rollover from a SIMPLE IRA to a traditional IRA or to another employer plan can be made only after you've participated in the SIMPLE IRA for at least two years. (Caution: You're generally limited to one tax-free, 60-day rollover from one IRA to any other IRA — traditional, Roth, SEP, and SIMPLE — you own in any 12-month period.)