SIMPLE IRA – A Complete Guide

SIMPLE IRA

What Is a SIMPLE IRA?

SIMPLE IRA stands for Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account (IRA). A SIMPLE IRA is a tax-deferred, employer-sponsored retirement plan for small businesses with fewer than 100 employees. Employers can make non-elective contributions of 2% of the employee’s salary. Or, employers can choose to match employee contributions up to 3% of their salary.

SIMPLE IRA Eligibility

To be eligible, employers must have 100 or fewer employees. Self-employed individuals and sole proprietors are also eligible. For employees to be eligible, they must have earned at least $5,000 in the last two prior calendar years. They must also earn at least $5,000 in the current year. Employers may make eligibility less stringent if they choose. Employers may also choose to exclude employees that receive union benefits.

SIMPLE IRA Benefits

Easy Set-Up

SIMPLE plans require minimal paperwork. A plan document and annual disclosures provided to employees are sufficient.

Low-Cost

Employers’ startup fees and maintenance costs are generally low. This is due to only needing a plan document at the start and annual disclosures.

Employer Tax Savings

Employers receive tax deductions for employee contributions they make.

How to Open a SIMPLE IRA

Step 1

Choose a financial institution that will serve as the trustee to each employee’s SIMPLE IRA plan. Employers may allow employees to choose their own financial institution.

Step 2

Complete a written agreement to provide benefits to all your eligible employees.

Step 3

Provide your employees with information about the agreement.

Step 4

Set up a SIMPLE IRA account for each eligible employee.

Employers can set up a SIMPLE plan effective on any date from January 1 through October 1 of any year as long as they did not previously have a SIMPLE plan.

If you are a new employer starting your business after October 1, you can set up a SIMPLE IRA plan after October 1. If you previously had a SIMPLE IRA plan, you can set up a new one effective January 1 of the following year.

A SIMPLE IRA plan cannot have an effective date before the date in which you adopt the plan.

Investing With a SIMPLE IRA

You can invest your SIMPLE IRA in the investments your account provider offers. Traditional account providers usually offer stocks, bonds, and mutual funds. Self-directed account providers allow you to invest in traditional and alternative investments.

Alternative investments include private placements, futures, real estate, private equity, and more.

Steps to Invest

First, you have to open your SIMPLE IRA account. Next, fund your account via a rollover, transfer, or contribution. Last, select an investment.

You should always consult with a financial advisor or CPA. They will determine which investments are best for you and your retirement goals.

SIMPLE IRA Plan Examples

Example 1 – 3% Matching Contributions

Toby owns Keep Ceramic, a pottery manufacturing company with 60 employees. Toby decides to establish a SIMPLE IRA plan for his employees. He plans to match his employees’ contributions up to 3% of their salaries. With this plan, if a Keep Ceramic employee does not contribute to their IRA, then they do not receive any employer contributions.

Example 2 – 2% Non-Elective Contributions

Lily owns Bark-a-Roo, a boarding kennel & grooming shop with 20 employees. Lily decides to establish a SIMPLE IRA plan for her employees. She plans to make a 2% non-elective contribution to all eligible employees’ plans. With this plan, Bark-a-Roo’s eligible employees receive 2% of their compensation whether they contribute to their plans or not.

SIMPLE IRA Contributions

SIMPLE IRA contribution limits are smaller than other retirement plans. You can contribute up to $13,500 of your earned income (+$3,000 catch-up contributions for those age 50 and over).

The SIMPLE IRA contribution deadline is January 30 of the following year. You are not required to contribute to your SIMPLE plan in any given year. Learn more about SIMPLE IRA limits on the IRS’s website.

SIMPLE IRA Rules

The IRS provides a SIMPLE IRA plan checklist to help ensure your plan follows the proper rules. Each year, you should review the requirements to keep your plan in compliance.

Filing

You do not have to file annual financial reports with the Federal Government for SIMPLE IRAs. Employers do not need to file an annual Form 5500 return. SIMPLE IRA contributions are not included on Form W-2. Employers only need to check box 13 for Retirement Plans on Form W-2.

Contributions are not subject to federal income tax withholding. Salary reduction contributions are subject to Social Security, Medicare, and federal unemployment taxes. Matching contributions and non-elective contributions are not subject to these taxes.

Correcting Operation Mistakes

The IRS has correction programs that help employers with correcting plan errors. These programs protect participants’ interests and keep the plan’s tax benefits. A frequent review of your plan will allow you to find errors faster. Be sure to have these errors corrected as soon as possible.

How to Terminate a SIMPLE Plan

You must maintain SIMPLE IRA plans for a whole calendar year, other than the first year you set up your plan. Once the plan starts, you must continue it for the calendar year. You must also make promised employee contributions.

If you decide to terminate your plan, you may consult with your plan trustee or financial advisor. They will discuss retirement plan options that may work better for you and your business.

To end your plan, you must notify your employees within a reasonable time before November 2. Inform them that the plan will no longer be effective as of the following January 1. This gives your employees time to find another retirement plan option if they choose. Then, notify the plan trustee.

Keep records of your plan’s termination. You do not need to notify the IRS of your SIMPLE IRA plan termination.

Example: A company decides on November 27, 2021, to terminate its SIMPLE IRA plan. The earliest effective date for the termination is January 1, 2023. The company must notify its employees of this intention before November 2, 2022.

Which Retirement Plan is Right for My Small Business?

If you are unsure if a SIMPLE IRA is right for your small business, there are other options to consider. Read our article “Retirement Plans for Small Business Owners.” This article compares SEP IRAs, SIMPLE IRAs, and Individual 401(k)s.

About Midland Trust

The Midland umbrella of companies is a leading custodial services provider. We focus on self-directed IRA accounts, 1031 exchanges, and private fund custody services. Midland has been in business since 1994. We focus on providing clients with opportunities to defer or eliminate taxes. Midland has thousands of satisfied clients and billions of dollars in assets under administration. We have the experience and knowledge to assist clients with their financial goals.

For questions about SIMPLE IRAs or to start investing in alternative assets with your SIMPLE IRA, contact Midland today. You can reach us at (239) 333-1032, or visit our website.

Futures and Forex Trading in an IRA – The Midland Process, Explained

futures and forex trading

The process of futures and forex can seem hard at first. But, after breaking it down, you begin to see a clearer picture. This article includes understanding what futures and forex are, investment rules and documents, how to book assets, and how to distribute an account.

What are Futures and Forex?

To better understand the process, you need to know what futures and forex are. Below are terms that will better help you understand this concept.

  • Futures contracts are standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a regulated commodity futures exchange. A commodity is a good such as wheat, gold, beef, corn, or oil. They fall into four categories, agricultural, livestock and meat, energy, and metal.
  • The forex market, better known as the foreign exchange market, consists of banks, investment management firms, and retail forex brokers and investors.
  • A forward contract is a private, cash market agreement between a buyer and seller for the future delivery of a commodity at an agreed-upon price. These are not standardized and non-transferrable.
  • The Spot market is where cash transactions for the commodity occur.
  • Futures trading is an agreement between a buyer and seller on a certain price for commodity-type items.

Futures and Forex Investment Rules:

There are a few important rules to follow when dealing with futures and forex. First, the trading account title is in the name of the IRA custodian or administrator. Second, you need to understand the ownership percentage. These investments will always be 100% owned by the IRA and never shared by multiple parties or IRAs.

Next, you must know that there is never any personal guarantee when investing with a futures or forex account. Lastly, all funds must flow through the IRA. Funds sent by the IRA would include additional funds and withdrawals.

Required Documents for Purchasing Futures and Forex:

To begin trading with futures and forex, you must first open an account at Midland. Next, you can select which trading company you would like to work with and fill out their application to open an account. Once processed, the brokerage will send the application over to Midland. We will then reach out to you to confirm the amount to send over to your trading account.

Trading Account Transaction Fees:

You will owe certain fees throughout the futures and forex process here at Midland Trust. Those fees are below.

Purchases

  • $50 transaction fee (no additional wire fee charged)
  • $325 per asset fee at the time of initial purchase (not for additional fundings)

Withdrawals

  • $25 transaction fee for withdrawals made through the Midland client portal (no incoming wire fee)
  • $50 transaction fee for manual/paper form processing of withdrawal request (no incoming wire fee)

Withdrawing Trading Account Funds:

When the time comes to withdraw funds from your futures or forex account, there are a couple of ways to go. One way is to liquidate the account. You can do this by submitting a “Trading Account Withdrawal” request through the Midland portal. Or you can complete the Midland Trading Account Withdrawal Form (TAW). The TAW is on our website or can be emailed to you.

Once Midland receives this request, we will send an email to the futures commission merchant (FCM) requesting a full or partial liquidation. The FCM will then send the funds back to the IRA. Secondly, you could perform a distribution from the account. To complete this, you begin by completing the “Midland Distribution Form” from the Midland client portal.

As the client, you must provide a current account statement from the FCM. You must also provide new titling on the trading account to personal ownership. The IRA must pay all fees related to the appraisal or attorney.

If you have any questions regarding trading futures or forex in an IRA or need help getting started, please contact Midland. Call us at (239) 333-1032, or visit our website and chat with one of our professionals.

Casey Lopresti, Client Services Associate

Written by Casey Lopresti

Client Services Associate, Midland IRA, Inc.