How to Set Up a SIMPLE IRA: A Step-by-Step Guide for Small Businesses
Setting up a SIMPLE IRA (Savings Incentive Match Plan for Employees) can be a smart, cost-effective way for small business owners to offer retirement benefits. SIMPLE IRAs are easy to establish and maintain, making them ideal for businesses with 100 or fewer employees. If you're ready to help yourself and your employees save for the future, here’s a step-by-step guide on how to set up a SIMPLE IRA.
What Is a SIMPLE IRA?
A SIMPLE IRA is a retirement savings plan designed specifically for small businesses. It allows both employers and employees to contribute to traditional IRAs, with tax advantages for both parties. Compared to 401(k) plans, SIMPLE IRAs involve less paperwork and lower administrative costs, making them attractive for growing companies. To learn more about SIMPLE IRAs click here.
Step 1: Make Sure Your Business Is Eligible
Before setting up a SIMPLE IRA, verify that your business qualifies:
You must have 100 or fewer employees who earned at least $5,000 in compensation during the previous year.
You must not have any other retirement plan in place for employees during the same calendar year.
If you meet these criteria, you’re ready to move forward.
Step 2: Choose a Financial Institution
You’ll need a financial institution (like a bank, mutual fund company, or brokerage firm) to act as the trustee for your SIMPLE IRA plan. The trustee holds the accounts and manages contributions and investments. IntelliVest Wealth Management can help business owners set up with a financial institution.
When choosing a provider, consider:
Investment options
Account fees
Customer support
Online management tools\
IntelliVest Wealth Management can help business owners set up with a financial institution and act as the financial advisor over the plan.
Step 3: Complete the Required Forms
To officially establish your SIMPLE IRA, you must fill out one of the following IRS-approved documents:
Form 5304-SIMPLE
Form 5305-SIMPLE
These forms serve as your official plan document and must be retained in your records. Please do not let this discourage you. IntelliVest Wealth Management can help you walk through these documents to help you officially set up your plan.
Step 4: Set Up Employee Accounts
After establishing the plan, each eligible employee must open their own SIMPLE IRA account at the designated financial institution. You or your provider will assist employees in completing the necessary paperwork to open these accounts.
It’s important to:
Notify employees about the plan details.
Provide a Summary Description of the plan, typically prepared by the financial institution.
Allow employees to make salary deferral elections (they decide how much to contribute from their paychecks).
Step 5: Decide on Employer Contributions
As the employer, you must make one of two types of contributions each year:
Matching Contributions: Up to 3% of the employee’s compensation.*
Nonelective Contributions: 2% of compensation for all eligible employees, regardless of whether they contribute.*
You must inform employees annually which contribution method you’ve chosen.
*With this option, you match the contribution of each participant on a dollar-for-dollar basis up to 3% of compensation. 5 This amount can’t exceed the salary deferral contribution limit for that year. Remember that with this method you contribute only to the SIMPLE IRA accounts of those eligible participants who make salary deferral contributions. For no more than two years out of five you may match a smaller percentage, but not less than 1% of compensation.
*The current compensation cap for calculating nonelective contributions is $350,000 for tax year 2025 and
$345,000 for 2024 (subject to adjustments for inflation in $5,000 increments). Matching contributions have
no compensation cap. A compensation cap means that if the employee’s compensation is over $330,000 in tax
year 2023, only $330,000 will be used for calculation purposes in tax year 2023, for example.
Step 6: Handle Ongoing Administration
Compared to 401(k) plans, SIMPLE IRAs are easy to maintain. Still, you’ll need to:
Deposit employee salary deferrals promptly (generally within 30 days after the pay date).
Make employer contributions by the employer’s tax filing deadline.
Keep records of all contributions.
Provide employees with annual statements of account activity.
IntelliVest Wealth Management can work with your CPA or payroll team to accomplish your goals.
Key Deadlines to Know
October 1st: Deadline to set up a SIMPLE IRA for the current year.
Final Thoughts: Why Setting Up a SIMPLE IRA Is Worth It
Offering a SIMPLE IRA can make your business more attractive to current and potential employees while helping you (and them) save for retirement. Thanks to low costs and straightforward administration, it’s an excellent first step toward building a strong benefits package.
By following these six steps, you can confidently set up a SIMPLE IRA and start enjoying the financial and recruiting advantages it offers.
Want to Learn More about SIMPLE IRAs?
If you would like more information to see if SIMPLE IRAs are right for you. Please contact us to schedule your free consultation.
Disclosure
IntelliVest Wealth Management is a Registered Investment Advisor Headquartered in Spartanburg South Carolina. This is not a solicitation or financial advice. Please note that this information may not be accurate as changes to laws and regulations change from day to day. This article should only be used for educational purposes. Please consult with IntelliVest Wealth Management about your personal financial situation.
