Tag: 401(k)
Six Things to Know about SIMPLE IRA
April 30, 2024
Offering a SIMPLE IRA (Savings Incentive Match Plan for Employees) to employees is an effective way for small businesses to offer their employees a retirement plan. At a glance, this plan allows both the employer and employee to make contributions, and there are less reporting requirements and paperwork involved for the small business owner. Besides the ease in which these plans can be established for employees, the main perks are tax incentives for both the employer and the employee. “They are fairly inexpensive to set up and maintain when compared to a conventional retirement plan,” says client advisor at First American Bank Karina Valido. “For employers, contributions are tax-deductible. For participants, contributions and earnings are not taxed until withdrawn.”
Even though the SIMPLE IRA is a straightforward retirement option, here are six things to know about this plan, whether you’re an employer or an employee.
- Employee Contribution Limits in 2024
With a SIMPLE IRA, an employee can, but isn’t obligated to, make salary reduction contributions. In 2024, the maximum amount an employee under the age of 50 can contribute is $16,000. With a SIMPLE IRA, you may also contribute to another retirement plan as long as both contributions don’t exceed the yearly limit. The annual limit for combined SIMPLE IRA and 401(k) contributions in 2024 cannot be more than $23,000 or $30,500 for people who are 50 or older. Since an employer cannot offer both plans, this would only apply to those employees who held a previous account elsewhere.
- Employer Contribution Requirements
Employers must do one of two things: match employee contributions or make nonelective contributions. If an employer chooses to match each employee’s salary reduction contribution, they must do so by up to 3% of their employee’s compensation. While an employer may choose to match less than 3%, they must at least match 1% for no more than two out of five years. If an employer chooses to make nonelective contributions of 2% of the employee’s compensation, they must do so for every employee, regardless of having some employees who are making their own contributions. So if an employer chooses to make nonelective contributions, then they must also match the contributions of those employees who choose to contribute to their own plans.
- SIMPLE IRA Tax Advantages
For employees, salary reduction contributions to their SIMPLE IRA reduces their taxable income and their investments will grow tax-deferred over time. Because it’s a tax-deferred account, you won’t need to pay capital gains taxes when you buy and sell investments within the account. Plus, unlike many other retirement plans, such as a 401(k), employer contributions to a SIMPLE IRA are immediately vested and belong to the employee.
Employers also benefit from tax incentives with the SIMPLE IRA. They can get a tax credit equal to 50% of the startup costs, or up to a maximum of $500 per year, for three years. This credit is in addition to the other tax benefits they will receive from contributing to employee retirement plans.
- All About Withdrawals
During retirement, withdrawals will be taxed as regular income. Before the age of 59 ½, there’s a 10% penalty on withdrawals in addition to the income taxes you would owe. With the SIMPLE IRA, the withdrawal penalty rises to 25% if the money is taken out within two years of the plan being contributed to. Under qualified exemptions, like higher education costs or first home purchases, then you may avoid an early withdrawal fee, but you would still have to pay the taxes.
- Eligibility for SIMPLE IRAs
The Small Business Job Protection Act of 1996 created the SIMPLE IRA. It was designed with small businesses and self-employed individuals in mind and meant to be simple, accessible, and inexpensive. “A SIMPLE IRA is a small-business-sponsored retirement plan that, as the name indicates, is simple to establish and maintain,” explains financial advisor at Marsh McLennan Agency Craig Reid. “Available to U.S. companies with 100 or fewer employees, SIMPLE IRAs are a cost-effective alternative to the mainstream 401(k) plan.”
In order to be eligible for a SIMPLE IRA, an employer must have fewer than 100 employees and have no other retirement plan in place. They must also make contributions each year. For an employee to be eligible, they must receive at least $5,000 in compensation during any two prior years and expect to receive the same during the current year.
- The Difference Between SIMPLE IRA and SEP-IRA
Both a Simplified Employee Pension (SEP-IRA) and a SIMPLE IRA are employer-sponsored retirement plans that offer employees a tax-advantaged way to save for their retirement. Contributions in each grow tax-deferred until they are withdrawn during retirement. They are each designed to be easily established in small businesses, especially when compared to a 401(k).
One key difference between the two plans is that while a SIMPLE IRA allows both the employer and employee to make contributions, the SEP-IRA only allows the employer to contribute. The SEP-IRA, though, does allow higher contributions, which will be limited to $69,000 in 2024, compared to $16,000 in 2024 for the SIMPLE IRA. The other main difference between the two plans is that any employer can offer a SEP-IRA, while only businesses with less than 100 employees qualify for offering the SIMPLE IRA.
If you’re a self-employed individual, a small business owner, or you have recently begun working for a small business that offers you a SIMPLE IRA, it will benefit you to know the upsides of having one and understand the rules around the plan. With Insureyouknow.org, you can store all of your financial information and records in one place so that you may stay organized and allow yourself the best decision-making process in your retirement planning.
2024 Changes that Would Impact Your Retirement Finances
April 1, 2024
Changes to retirement regulations are making 2024 out to be the perfect time to reexamine your retirement planning and make sure you’re getting the most out of your savings.
“The rules are constantly changing,” says director of Personal Retirement Product Management at Bank of America Debra Greenberg. “It’s always a good idea to familiarize yourself with what’s new to see whether it makes sense to take advantage of it.”
Here’s what you should know about several changes to retirement regulations in 2024.
It Pays to Plan for Retirement
While the changes to retirement regulations may seem small, Americans need all the help they can get right now. According to the National Council on Aging, up to 80% of older adults are at risk of dealing with economic insecurity as they age, while half of all Americans report being behind on their retirement savings goals.
“The IRS adjusts many things each year to reflect cost of living and inflation,” says Jackson Hewitt’s chief tax information officer Mark Steber. “It happens each year and taxpayers shouldn’t be alarmed — they might even have a bigger benefit.” Since retirement contributions are pre-tax, saving for retirement actually lowers your taxable income, which may even place you into a lower tax bracket. Plus, you may even be eligible for a tax credit of up to 50% of what you put into your retirement accounts.
Contribution Limits Will Increase
The contribution limits for a traditional or Roth IRA are increasing in 2024. The limit on annual contributions to an IRA will go up to $7,000, up from $6,500 last year.
Individuals will be able to contribute more to their 401(k) and employer-based plans as well. For those who have a 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan, the contribution limit is increasing to $23,000 in 2024, which is $500 more than last year. Those who are 50 and older, can contribute up to $30,500 into the same accounts.
Starter 401k Plans are Possible
In 2024, employers who don’t sponsor a retirement plan may offer a Starter 401(k) deferral-only arrangement. A starter 401(k) is a simplified employer-sponsored retirement plan with lower saving limits than a standard 401(k). Employers are not allowed to make contributions, and employee auto-enrollment is required. In 2024, the annual contribution limit to this plan will be $6,000. Beginning this year, employees with certain qualifiable emergencies may also make penalty-free withdrawals from their 401(k) of up to $1,000, though they would still have to pay the income tax on those withdrawals.
529 Plans Can Now be Converted Into Roths
For parents who will no longer need their 529 funds for their children, the Secure 2.0 Act will allow for a portion of the 529 to be rolled into a Roth IRA. Beginning January 1st, the funds can either be used for educational expenses or put toward retirement, as a Roth IRA rollover. You may rollover up to $35,000, free of income tax or any tax penalties. The only limitations are that the 529 must have been in place for at least 15 years, and certain states may not allow the rollover.
Changes to Social Security and RMDs
In January, Social Security checks will increase by 3.2% due to the latest COLA, or cost-of-living adjustment. On average, Social Security monthly benefits will increase by $59 a month, from $1,848 to $1,907. Those who receive survivors or spousal benefits will receive even more.
For 2024, the maximum benefit for a worker who claims Social Security at FRA (Full Retirement Age)is $3,822 a month, which is up from $3,627 in 2023. For 2024, the FRA is 66 years and 6 months for those born in 1957 and 66 years and 8 months for those born in 1958. That means that anyone born between July 2, 1957 through May 1, 1958 will reach FRA in 2024.
The IRS uses a calculation based on the amount in your retirement account and your life expectancy to determine the minimum amount you are required to take out each year, known as RMDs (required minimum distributions). Secure 2.0 increased the age for starting RMDs from 72 to 73, effective in 2023. If you are subject to RMDs, then you must make your withdrawal by the end of this year or by April 1st next year if it’s your first year being eligible. So if you turn 73 in 2024, you’ll have until April 1, 2025 to make your first RMD.
Anyone receiving more Social Security but paying Medicare premiums may not feel much of a difference in their increased Social Security benefits since standard Medicare Part B premiums are rising by 6%. As many participants have their Medicare premium deducted right from their Social Security payment, the $9.80 increase will take a portion of the average $59 benefit increase. The annual deductible will also increase this year from $226 to $240.
Insureyouknow.org It will always be important to review your retirement savings every year, but this is becoming even more important to do in the face of rising costs and changing regulations. With Insureyouknow.org, storing all of your financial information in one easy-to-review place can help you ensure that you are still on track to meet your retirement goals at the start of each annual review.