Are you looking to invest in a SIMPLE IRA plan for your business in 2022? If so, you’ll be interested to know that the SIMPLE IRA catch-up contribution limit has changed for this year.
In this blog post, we’ll take a closer look at the new limits and explain how they may impact your investment decisions, and we’ll talk about:
- What are the changes in employer contributions in 2022;
- How to start a SIMPLE IRA;
- How SIMPLE IRA works;
- What is the difference between SIMPLE IRA and 401 (k);
- Infinite Banking Concept as an alternative for a retirement plan.
Keep reading this article to see the best option for your retirement account!
Simple IRA Contribution Limits 2021 vs. 2022
Why does a SIMPLE IRA contribution limit exist in the first place? Because IRAs are tax-advantaged accounts, contribution limits were introduced to prevent the very wealthy from gaining more benefits than the average American.
In 2021 SIMPLE IRA contribution limits were:
- $13,500 for employees under the age of 50.
- $16,500 for employees at the age of 50 or older.
It has changed in 2022 to a contribution limit of:
- $14,000 for employees under the age of 50.
- $17,000 for employees at the age of 50 or older.
Many other plans have higher contribution limits. For 2022 401 (k) allows employees to contribute up to $20,500, while in 2021, it was $19,500. For 50+ people, the employee contribution limit in 2022 is $27,000, while in 2021, it was $26,000. Employee contributions to a SIMPLE IRA are made on a pretax basis, which lowers taxable income.
There is another option for people that have more than one job. Suppose an employee participates in any other employer plan and has elective salary reductions under those plans. In that case, the maximum contribution of elective deferrals someone can contribute to all plans in 2022 is $20,500 (in 2021, it was $19,500).
How Does SIMPLE IRA Work?
‘SIMPLE’ means Savings Incentive Match Plan or Savings Investment Match Plan for Employees. The SIMPLE IRA is a retirement plan for business owners because it lacks the reporting requirements and paperwork required with other workplace retirement plans. This type of retirement account combines features of both the traditional IRA and the 401(k)s.
The employee chooses whether they want to save pretax income in their accounts, which provides the benefit of lowering overall taxable wages. Employee contributions to a SIMPLE IRA lower taxable employee’s salary because it is made on a pretax basis.
Employers must match each employee’s salary reduction contributions on dollar-for-dollar, the matching contribution equal 1% – 3%, or nonelective announcements based on 2%. This requirement does not apply if the employer makes nonelective contributions instead. Whether the employee contributes or not, the employer will do everything possible so that every eligible employee has access to funds needed at retirement!
Side note: If you’re an employer, don’t forget to give the annual notice to all eligible employees.
Your money is safe in a SIMPLE IRA. It can be invested for growth, and you’ll pay taxes when it comes out of the account. There are no Roth IRAs options, so withdrawals from these retirement savings will have expected income tax consequences. But that means there’s also no need to worry about paying capital gains rates on investments sold during retirement either way because they’re already included within your regular rate.
Who Can Open a SIMPLE IRA?
To open a SIMPLE IRA, you and your employer must meet specific conditions:
- You need to be an employee of any company with 100 or fewer employees who receive pay from that business. Your boss doesn’t count. If they’re not qualified, they can set up one on behalf of their workers to ensure funds are available when needed most – like during retirement years.
- The employee will be eligible for participating in a Simple IRA if they have received at least $5,000 of compensation during any two out of the last three calendar years and expect to make that much or more this year. Employers don’t need to match their employees’ contributions – but whatever rules are set must apply equally. Treatment between SIMPLE IRAs is different than other types of plans.
Employees who receive union benefits may still enjoy participation without losing wages; however, those individuals cannot contribute nor do anything else, which would increase earnings towards hitting eligibility requirements. Employers have to make sure that they get money deposited into employees’ accounts correctly.
Simple IRA Withdrawal Rules
You may have to pay an additional 10% or 25% tax on the money you withdraw from your SIMPLE IRA. The withdrawal is taxed as usual, but this extra charge applies if you’re under 59-years old when it’s time for retirement, and there aren’t certain exceptions that apply in some cases (which will differ depending upon where we live).
There are also exceptions to additional taxes. If you are 59½ or older, you don’t have to pay other taxes when you withdraw the money.
Other exceptions:
- If your withdrawal is not more than:
- Your unreimbursed medical expenses. If they are more than 10% of your adjusted gross income, you are excluded from additional taxes. If your spouse is 65 or older, the criterion is 7.5%.
- The amount of money for medical insurance while you’re unemployed.
- The expenses for higher education.
- The amount of money for purchasing or rebuilding a first home.
- An annuity is the form of your withdrawal.
- A reservist distribution qualifies your withdrawal.
- If you are disabled.
- If you got a SIMPLE IRA account from someone who died.
- If your withdrawal is because of an IRS levy.
Participants in this retirement plan can roll their cash into a traditional IRA two years after first contributions to the account Big penalty for early withdrawal. If you are unsure about these withdrawal rules, you should consider legal or tax advice from someone.
Advantages of the SIMPLE IRA
Even though employees usually save for retirement in accounts like 401 (k), 403 (b), or 457, there are many inconveniences in these retirement plans’ rules for employees and employers. Instead of these traditional or Roth IRA accounts, many small businesses choose SIMPLE IRAs because of fewer rules, simple administration, and key benefits. Rather than having special administration procedures, the financial institution usually takes care of SIMPLE IRA accounts very similarly to personal IRAs or brokerage accounts.
These are the benefits of SIMPLE IRA.
Tax-Deferred Savings
All types of individual retirement accounts (IRAs) have in common an allowance for employees to defer some amount of their salaries into these plans. The money is constantly growing tax-deferred until they take distributions at retirement. This is why the IRA retirement savings plan is compounding more quickly.
Easier to Run
Unlike qualified plans, SIMPLE IRAs do not require most of the bureaucracy. In SIMPLE IRAs, there is no non-discrimination and top-heavy testing, vesting schedules, and tax reporting at the plan level. Thus, SIMPLE IRAs are pretty easy to set up and run and don’t require specially trained staff.
To ensure your taxes are done correctly, you’ll need to file IRS Form 5304-SIMPLE or 5315 with the appropriate information and document that will be paying for what. You can use these forms if each participant in this plan wants their own financial institution – know that there is a difference between using one versus having it all centralized on behalf of everyone involved.
Mandatory, Instant Vesting
Employees own matching contributions immediately, and they can leave with them despite tenure. In some qualified retirement plans, employer match employee contributions are usually determined by a specified number of years before employees have a matching contribution. It is generally arranged in a cliff or graded vesting schedule.
Employers who choose SIMPLE IRAs are required by law to catch up contributions. It is a considerable advantage compared to other qualified plans where it is possible the employer chooses to offer no match.
Tax Credit for Small Business Owners
In late 2019. former president Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE). Because of this act, small businesses have tax incentives that set up automatic enrollment in retirement plans for their employees.
It also allows employees to join multiple employer plans (MEPs). Thanks to MEP, workers can band together with other companies to offer retirement accounts to their employees. The maximum age cap for additional catch-up contributions is eliminated due to the bill, while it still exists in traditional and Roth IRAs.
SECURE act supports small businesses to take a tax credit to offset the cost of starting SIMPLE IRAs with auto-enrollment. Small businesses first receive the start-up credit (50% of necessary eligible start-up costs), and the tax credit is added to this start-up credit.
As a small business, and suitable candidate for the credit is the firms with 100 (or fewer!) employees who received at least $5,000 in compensation for the preceding year. Other requirements are to have at least one plan participant who was not a highly compensated employee and if similar plans didn’t cover the same employees.
Tax Credit for Employee Contributions
Employees whose adjusted gross income falls below a specific limit can take a non-refundable saver’s credit for $2,000 of contributions each year. For low-income and lower-middle-income people, the saver’s credit offers a tax credit of up to $1,000 if they have contributed to an employer-sponsored retirement plan. It is one of the ways how SIMPLE IRA provides employees tax benefits.
Single Tax Filers
If single taxpayers’ adjusted gross income (AGI) exceeds $34,000 in 2022 (in 2021, it was $33,000), they are unqualified. The income limit for married filing raised to $68,000 in 2022, while in 2021, it was $66,000.
Yet, everyone can have the 50% credit (the maximum credit) if they are a single tax filer and have an adjusted gross income of less than $20,500 in 2022 ( in 2021, it was $19,750). If someone’s income is higher but still below the maximum income limit of $34,000, they can have a reduced credit due to their income for the year.
Married Tax Filers
Married couples who sign up together can get the maximum credit if their income is less than $41,000 in 2022 (in 2021, it was $39,500). Don’t forget the credit phases out as the income increases above those levels until reaching the maximum income limits of $68,000 for 2022.
Multiple Investment Options
The ability to invest in multiple investment choices is one of the great benefits of having an IRA. You can choose from stocks, mutual funds, exchange-traded funds, and similar types of investments – many plans offer growth or income based on your needs. The same offer applies to SEP-IRA offers. Thanks to the SEP plan, employers can contribute to traditional IRAs set up for employees while also investing in mutual funds, stock, or whatever they prefer.
SIMPLE IRA vs. 401 (k)
Eligibility
The employer must offer participation in a 401k plan to employees 21 or older who have at least one year of employment with the company. An exception can be made if they choose not to do so; however, all new hires must become enrolled after their first day onboard (or within 30 days).
A flexible spending account is an excellent tool for employees who want to save money on their taxes. Flexibility and choice in contribution levels SIMPLE IRAs offer employees the tax benefits of a 401(K) with the convenience of a personal IRA.
To participate in this plan, an employee must have earned at least $5K over two years or expected earnings within the next 12 months before it begins. Effective employer contribution rates match up with what’s being contributed by themselves.
Size of the Company
There are a few different 401k plans that businesses can offer their employees. The primary difference between them is how much risk the employer takes when setting up this plan. For example, suppose your company has less than 100 workers. In that case, it’s only necessary to set aside money into an account for each worker, which means there will be fewer risks associated with investing funds from multiple sources into projects or stocks at once.
Larger companies need not worry about these things. They can take advantage of both sizes by offering several investment options within their SIMPLE IRA program before hitting certain milestones (like 200).
Contribution Limits
The contribution limits for retirement accounts are increasing in 2022. Employees can contribute up to $20,500 a year into their 401(k) account. Still, those over 50 will be able to increase that number by an additional catch-up contribution limit of Up To 6/5ths, which brings the total yearly limit to just under 27 thousand dollars. There are also new restrictions on when these contributions must occur, so make sure you do.
SIMPLE IRAs contributions include salary reduction contributions and employer contributions: a. matching contributions or b. non-elective contributions. The annual total for both SIMPLE IRAs contributions and other plan contributions can’t be more than $20,500 in 2022, as we mentioned earlier. The employees are in a position to choose financial institutions that will serve as trustees of the employees’ SIMPLe IRA if applicable, which is a two-edged sword.
Employer Matching Contributions
When an employer contributes to a 401(k) plan on behalf of their employees, they’re typically committing either 1%) or 100% (depending on how much is contributed by each party) towards that person’s contribution amount, which means this investment can grow with time if left unattended.
Taking advantage of free money is never a bad idea. If your company offers a 401k plan with contributions available to you well, the maximum amount possible should be put into this account. It’s common for employees to be delinquent in taking full advantage of their 401k plan.
After three years with the company, one out five workers have not yet vested! Vesting periods can span from 20% up to 100%. This means that individuals will not access all matching funds unless they remain employed and keep paying into this savings account. Over time Gains become substantial once you reach four months, but what do I need now? It makes sense: why wait any longer than necessary when options are available right away.
Matching for SIMPLE IRAs is stipulated as either a dollar-for-dollar match of up to 3% total annual compensation or with some limits on how much you can put in during your career. SIMPLE IRA accounts are a great way to save for retirement with investments that you make yourself. Participants in 401k plans can invest in individual stocks and bonds, though they cannot support more than 15% outside their plan’s stock funds or bond ladder fund (which is generally conservative). However, participants do get some control over how much risk there will be by choosing between index funds – which average out market fluctuations -or large high-risk cap specialty equity portfolios created just for them.
Should You Choose SIMPLE IRAs?
If you’re trying to decide whether a SIMPLE IRA is right for you, there are a few things you should keep in mind. First, SIMPLE IRAs have several disadvantages. For one, they can be expensive to set up and maintain. Additionally, they tend to have high fees and limited investment options. As a result, people looking for a low-cost way to invest their money may want to consider other options.
Another thing to remember is that SIMPLE IRAs are not suitable for everyone. If you’re self-employed or have a small business, a SIMPLE IRA may not be the best choice. However, if you’re looking for an easy way to save for retirement, a SIMPLE IRA may be suitable. Even though SIMPLE IRAs might be an easy way to save, other options for retirement savings are more prospering. Let us introduce you to the Infinite Banking Concept.
Infinite Banking Concept
The Infinite Banking Concept is a powerful personal financial strategy that can be used to save for retirement and invest for growth. Whether you’re an entrepreneur or an employee, Infinite Banking Concept can help you achieve financial freedom, gain wealth, and become your own banker.
With Infinite Banking Concept, you start by setting up a savings account with a whole life insurance policy. You use these accounts to build up your assets by making deposits and earning interest over time. Along the way, you will also gain valuable investment experience by exploring different options for growing your money and managing risk.
Ultimately, Infinite Banking Concept is a powerful tool for anyone who wants to take their finances into their own hands and achieve long-term financial well-being. Whether you’re just starting in your professional career or are looking to move into retirement with financial security, Infinite Banking Concept can be a valuable part of your overall strategy for building wealth. So why wait? Start using Infinite Banking Concept today and get on the fast track to financial success!
Final Thoughts
We hope this article helped you better understand SIMPLE IRA contribution limits, as well as the SIMPLE IRA plan and its advantages and disadvantages.
SIMPLE IRAs are a great way to save for retirement. Still, suppose you want to take your finances to the next level and become truly financially independent. In that case, we recommend signing up for our premium membership and learning about the Infinite Banking Concept. With this approach, you can grow your money while ensuring your savings will be there when you need them in retirement. Ready to get started?