Although not required for small business owners in most states, small business IRAs are a great way for owners and their employees to save for their futures. There are two major accounts you can set up as a small business owner, each with different set-up requirements, flexible options, and employee participation rules. One is called the Savings Incentive Match Plan for Employees (SIMPLE) IRA. Here are the most common questions small business owners have with regards to these this account option:
- What are the contribution limits of a SIMPLE IRA? For 2021, the annual contribution limit for SIMPLE IRAs is $13,500, the same amount as the year before. Workers age 50 or older can make additional catch-up contributions of $3,000, for a total of $16,500.
- How does matching work? For employers who choose the matching plan (rather than the flat 2% plan), employees will decide how much of their income they would like to contribute directly into their SIMPLE IRA. The employer then matches up to 3% of their income into the plan. If the employee decides to contribute 2%, the employer will also match the 2%. If the employee decides to contribute 5%, the employer will only have the ability to match up to 3%.
How do the tax deductions work? Employers can deduct contributions to a SIMPLE IRAs annually. The employee only pays the taxes on the distributions when they list it as taxable income on their tax returns.