SIMPLE IRA Basics for Self-Employment Income
This is the third installment in a multi-part series on retirement accounts for self-employment income.
You don’t have to be completely self-employed to find this or the other two retirement account options relevant. If you have self-employment income (even part-time side income), you could use these accounts to your benefit.
What is a SIMPLE IRA?
The SIMPLE IRA is a bit of a misnomer. It’s not just an easily-marketed and inviting name, but also a slightly deceiving acronym for “Savings Incentive Match PLan for Employees”.
Why deceiving? While it was created to be (and is) a “simple” retirement account option for employers with fewer than 100 employees (requires very little admin filing and costs to maintain), it is far from being the most “simple” of the three self-employed retirement account options for self-employed individuals, in my opinion.
SIMPLE IRA’s are much like Traditional IRA’s in some aspects, but particularly in that contributions are pre-tax (deductible from income). There are no after-tax Roth SIMPLE IRA options at the moment.
What are the Qualifications to Create & Contribute to a SIMPLE IRA?
As with the Solo 401k, there are no age restrictions with a SIMPLE IRA (like there is with the SEP IRA).
There are, however, income restrictions:
the employee (includes self-employed individuals) must have earned at least $5,000 in compensation during any 2 years before the current calendar year, and
the employee expects to receive at least $5,000 during the current calendar year.
Similar to the Solo 401k and SEP IRA, you do not need to be full-time self-employed in order to be eligible. You could be part-time self-employed or earn a side income from a secondary job. Having a Traditional 401k through another employer does not exclude you from being able to start and maintain a separate SIMPLE IRA.
You also do not need to have a registered corporation (LLC, S-Corp, etc.) in order to be eligible.
SIMPLE IRA Contribution Limits
As an employee, you can put all of your net earnings from self-employment in to a SIMPLE, up to $12,000 in 2015 and $12,500 in 2016 in salary reduction contributions. Those 50 or older can contribute an additional $3,000 for 2015 and 2016.
Separately, you can also match yourself as employer, with two options:
- match the employee contribution on a dollar-for-dollar basis up to 3% of the compensation (not limited by the annual compensation limit), or
- make non-elective contributions of 2% of the employee compensation up to the annual limit of $265,000 for both 2015 and 2016.
Similar to the Solo 401k, if you contribute as an employee and participate in any other employer plan during the year (i.e. a 401k in your day job), the total amount of the salary reduction contributions that you can make to all plans you participate in as an employee (including self-employment) is limited to $18,000 in 2015 and 2016. You may recognize that limit, as it is the same as the maximum 401k contribution limit.
For example, if you are under age 50 and have contributed $12,000 to your day job employer sponsored 401k, you can then only contribute $6,000 ($18,000 – $12,000) in 2015 and 2016 to your SIMPLE IRA as an employee. You could also match the 3% as your own employer.
SIMPLE IRA Contribution Deadlines
The contribution deadlines for SIMPLE IRA’s for self-employed individuals are two-fold:
- For self-employed persons with no common-law employees, the latest date for depositing employee salary reduction contributions for a calendar year is 30 days after the end of the year (January 30th).
- Matching employer contributions are generally due by the tax deadline for that calendar year (typically April 15). Extensions are possible. If a contribution comes between January 1st and the tax deadline, you can characterize it for the previous or the present calendar year. Contributions for a calendar year must be made prior to filing your taxes for that year.
SIMPLE IRA Contribution Calculators
If you want to double-check your math on how much you can contribute and compare to other retirement accounts, here are a few SIMPLE IRA contribution calculators that can lend a hand:
Can you Roll a SIMPLE IRA Into Another Retirement Plan?
Yes. You can roll a SIMPLE IRA in to another SIMPLE, a Traditional IRA, SEP IRA, or even a Roth IRA – just as you can a Traditional 401k. There is a weird restriction that is unique to SIMPLE IRA’s that I will highlight later in this post.
As with all pre to post-tax (Roth) retirement plan rollovers, any amount you roll over is considered taxable income in the year that you roll it over.
Where Can you Open a SIMPLE IRA?
All of the discount brokers, excluding optionshouse, in my “how to start an online broker account” article have an SIMPLE IRA option.
Always be sure to research minimum balance requirements and any associated fees, including account maintenance or inactivity fees before creating your account. Investment offerings available for SIMPLE IRA’s can vary as well, per broker.
Are there any Special Considerations to be Aware of?
One consideration I alluded to earlier with SIMPLE IRA’s is around an odd rule over rollovers.
A SIMPLE IRA cannot be rolled over to another retirement plan without two years having passed from the date the employee first participated in the plan. The only exception is a rollover from one SIMPLE IRA to another.
Other SIMPLE IRA Resources:
If you have any questions, definitely consult with a tax professional and/or a brokerage firm.
Outside of the SIMPLE IRA resources highlighted earlier, you should also check out the following articles: