Saving for Your Retirement: The SIMPLE IRA

This is the third in a series of articles that explain the variety of retirement plans family child care providers can choose from when contributing money towards their retirement.

The SIMPLE IRA stands for the Savings Incentive Match Plan for Employees of Small Employers. You don't need to hire an employee to set up a SIMPLE IRA for yourself. Here are its main components:

Eligibility: There are no income eligibility requirements for a SIMPLE IRA. You must show a profit for your business in the year you make a contribution.

Contribution limits: You may contribute up to $13,500 of your profit each year, or up to $16,500 if you are age 50 or older. (These are the 2021 limits.) You don’t have to contribute the maximum in any year.

Deadlines: Unlike any other IRAs, you must establish a SIMPLE IRA at least 90 days before the end of the calendar year (October 1st). The deadline to make a contribution is April 15 of the following year, or up to October 15 if you file a tax extension.

Tax deductability: Contributions to a SIMPLE IRA are tax deductible. When you withdraw money after age 59 1/2, you will owe income tax on both your contributions and your earnings on your investment.

Penalty: There is a more severe early withdrawal penalty for removing money from a SIMPLE IRA before age 59 1/2. The penalty is 25% if you withdraw money in the first two years. (The penalty for all other IRAs is 10%.)

EmployeesIf you set up a SIMPLE IRA for yourself, you may have to make a retirement contribution to your employees’ SIMPLE IRA. This will be required if the employee has earned at least $5,000 in any of the two preceding years, and if the employee is reasonably expected to earn at least $5,000 in the current tax year.

Therefore, if you have employees, or plan to have employees in the near future, you should consider whether or not a SIMPLE IRA is for you.

One big advantage of the SIMPLE IRA is your ability to contribute more than any other type of IRA, other than a 401(k) plan.

I will discuss other IRA options in future articles: SEP IRA, and the self-employed 401(k) plan.

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.moneycrashers.com/simple-ira/

I’ve written much more about IRAs in my book: Family Child Care Money Management and Retirement Guide.