The Drawbacks of a SIMPLE IRA
To be eligible to offer a SIMPLE IRA, a small business must have 100 employees or less. There is also a minimum contribution that must be made by the employer. Small business owners who decide to implement a SIMPLE IRA can also choose to match their employee’s contributions dollar for dollar, up to 3 percent of the employee’s compensation. This is usually enough of a contribution to meet the minimum limit. Other employers who are attempting to meet the contribution minimum may decide to contribute a flat 2 percent of compensation for each employee, regardless of the amount of money the employee contributes.
Another potential drawback of the SIMPLE IRA is that employees who contribute to the retirement fund have a cap on the amount they can put away each year. Every employee can only contribute $12,500 or less each year if they are under 50 years of age, and $15,500 if they are over 50 years of age. This limit does not encourage employees to save a lot for retirement, and should not be the employee’s only retirement vehicle. SIMPLE IRA account holders also incur a tax penalty if they take money out of the account early. Employees cannot have access to the account without being charged taxes on the money they take out.
The Benefits of a SIMPLE IRA
While a cap on the amount of annual contributions an employee can make to a SIMPLE IRA may put a damper on their retirement plans, it is a benefit for the small business owner. If the employer has chosen to implement a matching contribution for employees, the contribution cap can keep the employer’s contribution level more affordable while still meeting the requirements of the SIMPLE IRA.
As an employer sponsored retirement plan, a SIMPLE IRA is an attractive feature of a small business. It can be the financial perk that tempts new and talented potential employees to join the company’s workforce. A SIMPLE IRA can also be the incentive that prevents a tried and true employee from looking for work elsewhere.
If you are a small business owner who is considering all the advantages and disadvantages of retirement options for your employees, a SIMPLE IRA may be the right choice for you. As a full-service tax and accounting firm in New York City, we can answer your important questions about implementing a SIMPLE IRA or another retirement option in your small business. If you are looking for expert assistance with your business’ finances, call 212 Tax & Accounting Services today.