A Savings Incentive Match Plan for Employees (SIMPLE) IRA is another type of employer plan.  With a SIMPLE IRA, the employer matches up to 3% of compensation or 2% non elective and the contribution also grows tax deferred.  The contribution limits for 2022 for a SIMPLE IRA is $14,000 and also allows for a $3,000 “catch-up” for those over the age of 50. For 2023, the contribution limit for a SIMPLE IRA increased to $15,500. If you are age 50 or over, the catch-up contribution limit also increased, making it possible to contribute an additional $3,500 for 2023, up from $3,000 in 2022. SIMPLE IRA distributions follow the same distribution rules as Traditional IRAs, with one significant difference. Early withdrawals generally are subject to a 10% additional tax if taken before age 59 1/2. However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation in the plan. Distributions are taxed as ordinary income for the tax year of the distribution.

Check out this blog on Understanding Self-Directed Employer Plans and Which One is Right For My Business

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SIMPLE IRAs also have a few deadlines:

  • Open Deadline: October 1st of current year
  • Employee Fund Deadline: Defer from last paycheck or December 31st
  • Employer Fund Deadline: Extended due date of the business tax return
  • SIMPLE IRAs must be open for two years before transfer outs are allowed

2022 Contribution Limits:

  • $14,000 (Before age 50)
  • $3,000 catch-up (Age 50+)

Answers to some of the most frequently asked investing questions (FAQs) about SIMPLE IRAs

Can I buy real estate with a SIMPLE IRA?
“Buying real estate with an IRA or a solo 401k certainly can be done! You just need to find a custodian that will hold non-traditional or ‘alternative’ investments.”

Can I use a SIMPLE IRA to buy a house?
“You can use a SIMPLE IRA to buy a house.”

How do I use a SIMPLE IRA to buy a house?
“You first need to find a custodian that will hold non-traditional or ‘alternative’ investments and establish an IRA with them. You will then locate the house you want to purchase, and typically, your custodian will require you to sign some internal forms. After making sure the contract is in the name of the IRA, your custodian will purchase the property for you on behalf of your IRA.”

Is a SIMPLE IRA the same as a Traditional IRA?
“A SIMPLE IRA is a type of Traditional IRA. Contributions are tax-deductible, the investments grow tax-deferred until distribution, and distributions are taxable.”

What are the SIMPLE IRA distribution rules?
“At age 59 and a half, you can take any amount from your SIMPLE IRA without having to pay a 10% penalty. Since taxes have been deferred, regular income tax will still be due when you take a distribution.”

How do you set up a self-directed SIMPLE IRA?
“You will first need to find the custodian you like! Once you have picked a good custodian, you will complete some paperwork (typically an application) and in a few days, your account will be open. *Processes will vary by custodian.”

What is the difference between a SEP IRA and SIMPLE IRA?
“Both are employer plans, but a SEP IRA only allows business owners to make contributions for both themselves and their employees, whereas a SIMPLE IRA allows both the employee and the employer to make contributions.”