The Ultimate Guide to SIMPLE IRA Plans

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There are various workplace retirement plans and one of them is the SIMPLE IRA.

Even though it’s one of the less popular other retirement savings plans, such as Roth IRA or 401(k), with the percentage of IRA investors with a SIMPLE IRA plan of only about 8% in 2016, it keeps gaining popularity.

This variety of IRA has plenty of advantages and disadvantages that should be explored.

We’re here to explain the concept of SIMPLE IRA plans and help you gain insight into how it functions. In this article, we’ll explain:

  • What is a SIMPLE IRA and how does it work?
  • How can you establish a SIMPLE IRA plan?
  • How is a SIMPLE IRA supposed to be maintained?
  • How can you terminate this plan?
  • How does it compare to some other popular retirement plans?
  • What are the advantages and disadvantages of a SIMPLE IRA plan?
  • How can you build financial stability with Whole Life insurance?

We hope that this article will answer all of the questions you may have about this subject.

What is a SIMPLE IRA?

Employer-sponsored retirement plan

A SIMPLE IRA plan is an employer-sponsored retirement plan to which both the employer and the employee can contribute. SIMPLE is short for Savings Incentive Match Plan for Employees, while IRA stands for Individual Retirement Account.

However, while the employer is required to contribute, the employee has the option to choose.

The SIMPLE IRA is usually utilized by self-employed individuals or small business owners with fewer employees who don’t carry any other retirement accounts. Additionally, it has some other advantages over traditional retirement accounts, mainly in the economic sense.

The SIMPLE IRA contributions are tax-deferred and they’re always entirely owned by the employee, although income taxes apply in early withdrawal.

How do SIMPLE IRAs work?

As explained above, both the employer and the employee contribute to the employee’s savings account in the SIMPLE IRA plan. Although the employer has to do it, the employee can choose whether they want to.

When it comes to employers, they can either choose non-elective contributions or matching contributions.

Nonelective contributions equal 2% of the employee’s salary no matter how much the employee chooses to contribute. In comparison, the matching contributions are the employer’s same investment as the employee’s contributions as long as they’re up to 3% of their salary.

Employers can switch between these two options throughout the year if they notify the employees on time.

In the investment sense, SIMPLE IRAs are relatively similar to other retirement options. It’s a tax-deferred account with assets that can be invested in different funds and securities, depending on the investment options the financial institution hosting the plan allows.

Additionally, you won’t have to pay capital gains taxes when buying and selling investments inside your account.

Who can get a SIMPLE IRA?

The main difference between more popular plans, like the 401(k), is that this type of plan is created for small businesses with 100 or fewer employees. Thus, there are certain restrictions both when it comes to eligible employers and eligible employees.

When it comes to employers, only those with 100 or fewer employees can establish SIMPLE IRAs. This rule also applies to self-employed individuals.

Additionally, only those employers that don’t already have some type of retirement plan currently operating can start a SIMPLE IRA plan for their business.

On the other hand, eligible employees are required to have received at least $5,000 in compensation in the past two years or are expected to gain that much during the following year.

The employer can only change these employee requirements for pre-tax contributions if they make them less stringent and apply to all employees equally.

As well as that, an eligible employee that receives union benefits can be emitted from the plan by the employer. Alien employees without U.S. wages or other personal services compensation from the employer can also be emitted.

There are no age restrictions.

How to set up a SIMPLE IRA

The actions you need to take to establish SIMPLE IRAs are straightforward. We’ll explain the process to you step by step.

Choose a financial institution

As an employer, the first step you need to take is choosing an adequate financial institution to host your SIMPLE IRA accounts.

This institution will be named a trustee and it’ll receive everything contributed to the plan. On the other hand, you can also let the employees make this choice.

Before committing to retirement savings plans, make sure you do the proper research, contact your tax advisor, and get all the information about possible financial institutions, including their rules and account fees.

Create a written agreement

You can use two different forms to establish a SIMPLE IRA plan.

The first one is Form 5304-SIMPLE, which you can use if you let the employees choose their financial institution to host the plan at.

On the other hand, Form 5305-SIMPLE should be used if the employer determines the financial institution.

The employer should keep the original filled and signed SIMPLE IRA adoption agreement without filling it to the IRS.

You could also use a prototype document provided by qualified institutions, like banks or mutual funds.

Annual notice to eligible employees

The period before setting up a SIMPLE IRA plan is called an election period. It lasts 60 days, during which the employer is required to notify the employees about the following information:

  • Their opportunity to participate in the plan if they made at least $5,000 in compensation previous year;
  • Choosing a financial institution, if allowed;
  • Whether the plan incorporates non-elective employer contributions or a match plan for employees;
  • A summary description of the plan; and
  • A written notice informing the employee that they can transfer their balance to the employer-designated financial institution without penalty or cost if that is required.

Set up a SIMPLE IRA for each employee

The next step the employer has to take is setting up a SIMPLE IRA for each individual eligible employee. All retirement contributions have to go to this plan, whether they’re employer matching contributions or a similar SIMPLE IRA contribution.

Each financial institution the employer or the employee may choose for a retirement savings plan has to notify both parties of any contributions, fees or commissions.

The funds can be invested into mutual funds, stocks and other similar financial products.

It’s crucial to note that a SIMPLE IRA isn’t the same as Roth IRA.

The right timing

Employers can establish a SIMPLE IRA anytime from January 1 to October 1 of the current year, as long as they haven’t previously utilized this plan.

If they did, they had to wait until January 1 to implement it again.

This rule doesn’t apply to new business owners, even if they start their business after October 1. Their retirement plan can be established as soon as they’re finished with other administrative tasks.

How to maintain a SIMPLE IRA

Maintaining SIMPLE IRAs is an easy task, with no required tax reporting, IRS filing and compliance testing.

SIMPLE IRA contribution limits

There are a couple of SIMPLE IRA rules when it comes to contributions.

As mentioned before, while the employer is required to contribute to this plan, the employee can choose whether they want to or not. All contributions come with a limit and are based on eligible employee’s compensation.

Starting with employees, as of 2022, the rules state that the annual compensation limit is $14,000. If the employee is age 50 or older, they can add up to $3,000 to the original limitation sum.

Employees’ contribution limits are subject to cost-of-living adjustments and are changeable.

This limit continues to grow, considering that during the years 2020 and 2021, the contribution limit for each employee was $13,500, with the same allowed “catch-up” for older employees.

As mentioned before, employer contributions can be a non-elective contribution which equals 2% of the employee’s compensation, with a maximum salary of $305,000 in 2022.

Additionally, they can pick a matching contribution of up to 3%, also known as automatic enrollment. This limit can be lowered for an employer contribution, although not to less than 1%.

Depositing contributions

SIMPLE IRA contributions can be made by both the employer and the employee. The employer contribution should be annual, while the employees need to deduct contributions from their salary monthly.

Employees’ salary deferral contributions have to be deposited within 30 days of the end of the month.

Employers must deposit their contributions by the due date for filing the federal income tax return.

Basic withdrawal rules

The employee immediately owns all contributions to the SIMPLE IRA plan and they can withdraw funds from it at any time, although loans aren’t permitted.

However, as with other employer-sponsored retirement plans, the employee will have to pay taxes for every withdrawal they make from their own retirement savings at their marginal tax rate.

In addition to the income taxes, withdrawal comes with specific penalties similar to those of traditional IRAs. If you’re under 59 ½ years old, you’ll also have to pay a 10% penalty of the withdrawn sum.

Also, if you’ve only used the plan for less than two years, that penalty rises to 25%.

In some instances, employees could avoid these penalties if they needed funds for qualified higher education expenses or unreimbursed medical expenses.


Contributions are allowed to be rolled over from one SIMPLE IRA plan to another completely tax-free. Employees can even roll over funds from this plan to some other type of IRA if they had the SIMPLE IRA for more than two years.

Stopping contributions

Employees can choose whether they want to participate in SIMPLE IRA during the election period, but they can also terminate their contributions at any time. Employers will still be required to continue contributing.

However, this may mean that they’ll be stopped from contributing until the following calendar year.

Notice and filing requirements

Generally, there are no filing requirements that the employer has to make for a SIMPLE IRA plan. Consequently, they won’t have to file an annual Form 5500 return.

However, while contributions are tax-deferred, salary reduction contributions are subject to medicare, social security and federal unemployment taxes (FUTA). Non-elective and matching contributions don’t subject to these taxes.

SIMPLE IRA plan termination

Once an employer starts a SIMPLE IRA, they’re required to participate for an entire year, unless it’s their first year of utilizing it.

To start the termination, the employer has to first notify their employees of said action before November 2.

Next, they’ll have to notify their chosen financial institution, which hosts the plans of said termination and search for a different retirement plan.

Each file and form should be carefully kept, but there’s no need to file with the IRS about the plan’s termination.


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Some of the most popular retirement plans include Traditional IRA and a 401(k). Here’s how they compare to the SIMPLE IRA plan.

As of 2020, the value in IRA accounts grew to around 19.29 trillion U.S. dollars.

Simple IRA vs. Traditional IRA

With plenty of similarities, contributions for both are tax-advantaged retirement plans, which reduce taxable income for the following year. Both individual retirement accounts also let you invest with tax-deferred growth.

Simple IRA vs. 401(k)

The main similarity between these two is that both plans let the employer choose whether and how much they want to contribute. However, a 401(k) has higher contribution limits.

Pros and cons of the SIMPLE IRA

Every plan has advantages and disadvantages, both for the employer and the employee. Here are some of the critical ones for this plan.


For the employer

  • Uncomplicated to establish and requires minimum paperwork
  • A plan with a very low establishing and operating cost
  • Shared responsibility with employees to ensure their financial future
  • No required discrimination testing
  • No tax-filing necessary
  • Employee contributions are filed as a business expense — tax benefits

For the employee

  • Employer contributions are tax-deferred
  • Pre-tax income
  • Investments grow tax-deferred
  • Retirement benefits
  • Possible investment in stocks, bonds, mutual funds and other similar products
  • The non-elective version will let employees not participate if they don’t want to, but the employers will still have to make contributions
  • Matching contributions of up to 3% of annual compensation if the employee contributes
  • Full ownership of all the funds in the plan
  • Self-employed individuals can have some other type of IRA
  • Allowed rollovers with certain limitations


For the employer

  • Contributions aren’t flexible
  • They can’t use any different plans at the same time
  • For individual workers and small businesses only
  • They have to make contributions even when the employees choose not to

For the employee

  • Contributions aren’t flexible
  • Lower contribution limits than other workplace retirement plans, like 401(k)
  • Loans aren’t permitted
  • No Roth version of this plan
  • employees have to pay income taxes and penalties for early withdrawals

Saving for the future

Saving for retirement is a serious and complex task, but it’s unquestionably a path everyone should take.

There are many different ways to save for the future, some of which we mentioned in this article, such as the SIMPLE IRA plan. However, there’s more to ensuring financial stability than retirement planning.

We’re here to teach you about the concept of Infinite Banking.

This concept can be used to help you secure your financial future and bring you additional benefits. If you want to try Infinite Banking, you first need to own a Whole Life insurance policy. Here are some of the crucial aspects of this concept you should know about.

Infinite Banking is a strategic method for utilizing your Whole Life insurance policy to create an endless banking system. To put it in other words, Infinite Banking means being your own banker.

Owning an overfunded Whole Life insurance policy has many benefits, one of them being that you can borrow money from it using your policy’s cash value and repay it later. This way, you borrow money from yourself instead of a bank, and you pay it back to yourself with the rate of return, thus becoming your own bank.

With the Infinite Banking method, you can access your financial goals and gain complete control of your finances without dealing with banks and fees.

Infinite Banking involves:

  1. Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company.
  2. Accumulation of Cash Value (tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
  3. Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.

All of these aspects culminate in creating your own bank. You borrow from yourself while your Whole Life insurance policy still earns dividends even though you’re using those funds elsewhere.

No matter what your financial objectives are, Infinite Banking can help you reach them. Entering the Banking Business gives you better control over your personal finance and helps you build wealth using the life insurance policy.

Final thoughts

Utilizing SIMPLE IRA plans, also known as Savings Incentive Match Plan for Employees of Small Employers, to save for retirement has plenty of benefits for both employers and employees. We hope that this article helped you find answers to all of the questions you had.

Opting for a retirement plan is a significant step towards ensuring your financial future, so make sure you have all the information before committing. Additionally, we also hope that this article interested you in the concept of Infinite Banking with Whole Life insurance.