How To Set Up A Simple IRA

Setting up SIMPLE IRA plans can seem overwhelming, but are pretty simple, and also something our firm specializes in for small businesses. 

Looking for a retirement plan for your employees that's easy and inexpensive to administer? Well, there may be a simple answer: the Savings Incentive Match Plan for Employees of Small Employers, better known as the SIMPLE IRA plan. A SIMPLE IRA plan lets your employees defer up to $12,500 in 2017 ($15,500 if age 50 or older). You promise to match employee contributions dollar for dollar up to 3% of pay,^* or to make a "nonelective" contribution for all eligible employees, whether or not they contribute, equal to 2% of pay. (No more than $270,000 of pay can be taken into account in 2017.)

Your employees are eligible if they've earned at least $5,000 during any two preceding years (whether consecutive or not) and are expected to earn at least $5,000 in the current year. Eligibility does not depend on the employee's age or how many hours the employee works for you.

You can adopt aSIMPLE IRA plan for 2017 only if you had 100 or fewer employees in 2016 (excluding employees who earned less than $5,000) and you don't contribute to any other retirement plan. If your business qualifies, follow these three simple steps to set up your SIMPLE IRA plan. (You have until October 1 to set up a new SIMPLE IRA plan for 2017.)

Step 1: Adopt a written plan document

You can set up a SIMPLE IRA plan by completing either a pre-approved document provided by a financial institution (for example, a mutual fund company, insurance company, or bank) or an IRS model document (either Form 5305-SIMPLE or Form 5304-SIMPLE).

Form 5305-SIMPLE lets you specify the "designated financial institution" that will both act as your plan's trustee/custodian and initially receive all plan contributions. Form 5304-SIMPLE, on the other hand, lets each eligible employee select the financial institution that will serve as trustee/custodian and receive all plan contributions.

Step 2: Provide information

You must provide your eligible employees with the following information before the beginning of each election period:

• An explanation of the employees' ability to make or change salary reduction elections
• Whether you'll make matching contributions or nonelective contributions for the coming year
• A summary description of the plan
• A notice that employees can transfer their account balances to an IRA provider of their choice without cost or penalty, if you use a designated financial institution

The election period is generally the 60-day period prior to the start of each calendar year (November 2 to December 31). However, the election period will be different if you set up a SIMPLE plan mid-year, or if an employee first becomes eligible after the 60-day period ends. Forms 5304 and 5305 contain most of the forms you'll need to comply with these notice requirements.

Step 3: Set up employee accounts

A SIMPLE IRA account must be set up by or for each eligible employee, and all contributions to the plan must go into these accounts. Employees must make important decisions about investing their SIMPLE IRA retirement dollars based on the investment options available at the financial institution that holds their funds.

Key differences between a SIMPLE IRA plan and a traditional 401(k) plan:

The information in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. JBL Financial Services, Inc. and LPL Financial do not provide tax advice or services.

This article was prepared by Broadridge Advisor Solutions.