What Is a SIMPLE IRA or Payroll Deducted IRA?

By Mike Jesowshek, CPA

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Posted on February 01, 2022

When we are working with businesses that have employees and want to offer a retirement option but may not want to get too complicated with a 401k, we usually land on two main options:

SIMPLE IRA
Payroll Deducted IRA

What Is a SIMPLE IRA and What Do I Need To Know About SIMPLE IRAs?

A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to pre-tax IRAs set up for employees.

Contributions and Matching
- Contributions up to $13,500 for 2021.
- Employer can choose from a 2% contribution to all eligible employees OR a 3% matching contribution (only those who choose to contribute).
Tax Advantages
- Business contributions are deductible business expenses.
- Investment gains are tax deferred until distribution.
- Roth option NOT available.
Filing and Compliance
- Employer does not need to file a 5500.
- Discrimination testing is not required.
Notes
- If you are a business owner with employees but want to keep retirement “simple”, this is a great easy option.

What Is A Payroll Deducted IRA and What Do I Need To Know About A Payroll Deducted IRA?

A placeholder until your company is ready to onboard a full on retirement plan.

Definition
- An employee establishes an IRA (either a Traditional or a Roth IRA) with a financial institution.
- The employee then authorizes a payroll deduction for the IRA.
- The employer’s responsibility is simply to transmit the employee’s authorized deduction to the financial institution.
Contributions and Matching
- Contributions up to $6,000 for 2021.
- Employer does NOT match contributions.
- Employer deductions contributions from employee’s paycheck and sends to the financial institution.
- All employees may participate.
Tax Advantages
- Employee contributions and investment gains may enjoy tax deferral until distribution.
- Both traditional and Roth IRAs available
Filing and Compliance
- Employer does not need to file a 5500.
- Discrimination testing is not required.
- Once the employer submits the contributions, they have no further responsibility.

If you are looking for professional advice and help in this area, we work directly with Life, Inc Retirement Services. Email us for an introduction or visit this page.

On the link above you can setup a call to connect with an expert and get started right away. There is also a retirement plan evaluator which will guide you towards the best plan for your business.

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