How do I open a simple Roth IRA?
You can use Form 5304-SIMPLEPDF or Form 5305-SIMPLEPDF to set up a SIMPLE IRA plan. Each form is a model Savings Incentive Match Plan for Employees (SIMPLE) plan document. Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions.
Who can establish a SIMPLE IRA plan? Any employer (including self-employed individuals, tax-exempt organizations and governmental entities) that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year (the "100-employee limitation") can establish a SIMPLE IRA plan.
There's no fee to establish an account. We charge $25 a year for each Vanguard fund in a SIMPLE IRA.
A SIMPLE IRA must be set up by or for each eligible employee and all contributions to the plan must go to it. A SIMPLE IRA cannot be a Roth IRA.
Disadvantages of a SIMPLE IRA include their low contribution limits — they are lower than the other two types of self-employed retirement plans. Other downsides include the strict requirements around plan loans, early withdrawals, and rollovers.
During the first 2 years of participation in a SIMPLE IRA plan, you may roll over amounts from another SIMPLE retirement account. After 2 years of participation, you also may roll over amounts from a qualified retirement plan or an IRA.
Simple IRA vs. Roth IRA: What's the Difference? Eligibility: A Simple IRA is for employers with 100 or fewer employees earning at least $5,000 in any previous calendar year. In contrast, Roth IRAs have income thresholds for eligible individuals, whether their filing status is single or married filing jointly.
Eligibility: A Simple IRA is for employers with 100 or fewer employees earning at least $5,000 in any previous calendar year, and is expected to in the current year. In contrast, Roth IRAs have income thresholds for eligible individuals, whether their filing status is single or married filing jointly.
In general, you're eligible to participate in a SIMPLE IRA if you've received at least $5,000 in compensation during any two preceding calendar years and expect to earn at least that much during the calendar year of participation.
One of the biggest benefits to opening a SIMPLE IRA is that they're much easier to set up and less expensive to run than a typical 401(k) plan or other “qualified plans.” That's because they have lower administrative costs and fewer regulations to worry about. That's music to any business owner's ears!
Who is a SIMPLE IRA best for?
SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts, is employer-sponsored. This means it is offered to employees through a business. These types of retirement plans are made specifically for small businesses with 100 or fewer employees.
Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances. There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax-free and penalty free after age 59½ and once the account has been open for five years.
Regardless of whether you work with a pro or sign up on your own, you'll have some paperwork (or online forms) to fill out to open your Roth account. Make sure you've got all the information below handy once you're ready to fill out the forms: Your driver's license or other government-issued form of photo ID.
If the SIMPLE IRA is a Roth, the employee contribution goes into the account after tax. Then the money can grow tax-free for decades and will be tax-free when withdrawn from the account beginning at age 59-½. For 2024, employees can contribute up to $16,000, and $19,500 for employees age 50 and over.
The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $16,000 in 2024 ($15,500 in 2023; $14,000 in 2022; $13,500 in 2020 and 2021; $13,000 in 2019 and $12,500 in 2015 – 2018).
To contribute to a Roth IRA, single tax filers must have a modified adjusted gross income (MAGI) of less than $153,000 in 2023. In 2024, the threshold rises to $161,000. If married and filing jointly, your joint MAGI must be under $228,000 in 2023.
A SEP IRA allows employers to contribute up to $66,000 (in 2023), or up to 25 percent of an employee's salary, whichever is less. In contrast, a SIMPLE IRA allows employees to contribute up to $15,500 (in 2023), while employers can add additional contributions.
This means the employer does not withhold part of the contribution for federal income tax before the funds are deposited in a SIMPLE IRA. Hence, the employer does not report the contributions as an income on W-2 form, and you won't be required to report the contributions as income on your tax return.
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of tax-deferred retirement savings plan. SIMPLE IRAs are easy to set up, and they can be a good option for small businesses. They have some drawbacks, and businesses that can afford to set up other plans might consider it.
Can I cash out my SIMPLE IRA?
Withdrawals from SIMPLE IRAs
Generally, you have to pay income tax on any amount you withdraw from your SIMPLE IRA. You may also have to pay an additional tax of 10 percent or 25 percent on the amount you withdraw unless you are at least age 59 1/2 or you qualify for another exception.
SIMPLE IRAs: There are no age limits with this type of IRA either. Additionally, employers must continue to make matching or non-elective contributions to your plan regardless of your age. However, you still need to take RMDs at age 73 in 2023 or 70.5, depending on your birthday.
In 2024, employees can contribute $16,000 into their SIMPLE IRA, which is up from the 2023 SIMPLE IRA limit of $15,500. Employees age 50 and older can contribute an extra catch-up contribution of $3,500 in both years.
Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan).
The Bottom Line
The benefits of converting a SIMPLE IRA to a Roth IRA include tax-free withdrawals in retirement and no required minimum distributions (RMDs).
