How to Set Up a SIMPLE IRA in 5 Easy Steps

SIMPLE IRAs are employer-sponsored retirement plans that allow employees and employers to save up to $25,000 in pre-tax contributions each year. The process for setting up a SIMPLE IRA is easy and inexpensive once you’ve determined your eligibility. The right provider will help you complete forms, get employees enrolled, and administer your plan.

Looking to save more than $25k per year? A 401(k) plan allows business owners and employees to save up to $55k per year. For a low-cost, full-featured, 401(k) plan that is able to grow as you do, consider Spark 401k. The one-time setup fee is $750 and administration costs start at just $100 per month. Get started at Spark 401k.

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The 5 steps to setting up a SIMPLE IRA are:

1. Determine SIMPLE IRA Eligibility & Benefits

SIMPLE IRAs are extremely beneficial for some business owners with fewer than 100 employees. They allow employees to make salary deferrals up to $12,500 annually, which you must match dollar-for-dollar between 1% – 3%. For a SIMPLE to be appropriate, you should plan to personally contribute between $5,500-$12,500 each year and shouldn’t mind mandatory matching.

In addition to deferrals, you can profit share another $12,500, for a total contribution limit of $25,000 per year. All profit sharing and employer match is tax deductible. If these numbers make sense to you, then you are eligible to open a SIMPLE IRA but have to do so before October 1st of the current year for it to take effect that year. However, there are many other retirement plans out there that may be better, depending on your specific situation.

A few cases where you may find another account type better than a SIMPLE IRA include:

• SEP IRA – If you have fewer than 3-5 employees, SEP IRAs have much higher contribution limits at $55,000 annually.
• Traditional 401(k) – Business owners who have more than 3-5 employees and don’t want to be required to match contributions should consider setting up a 401(k).
• Safe Harbor 401(k) – Safe Harbor plans are the cream of the crop. They have requirements for matching employee deferrals, but make it very easy for you to maximize annual contributions and help you contribute large amounts without plan compliance testing.

We discuss these alternatives in detail at the end of our article. If they sound like a better option for your business, check out Spark 401k. They offer small businesses traditional 401(k) plans, safe harbor plans, and solo 401(k) plans that are affordable and easy to set up. Not only that, but they cost up to 66% less than the industry average. Get started with Spark 401k and a 401(k) advisor will help you select the right plan for you and your business.

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Who SIMPLE IRAs Are Right For

SIMPLE IRAs are best for small companies that are still growing or aren’t yet highly profitable. Business owners can use SIMPLEs to encourage employee savings without the administrative costs of 401(k)s. SIMPLE IRAs contribution limits total $25,000 in deferrals and matching – lower than 401(k)s but still sufficient for many small business owners.

To qualify for a SIMPLE IRA, you must have fewer than 100 employees and match employee deferrals dollar-for-dollar up to 3%. For a SIMPLE to be appropriate for your business, you should have more than 5-8 employees and want to contribute more than $5,500 annually for yourself.

Pros & Cons of SIMPLE IRAs

SIMPLE IRAs offer a number of benefits for employers, but they also have some unique drawbacks. It’s important to consider both when deciding whether a SIMPLE IRA is right for you.

Pros of a SIMPLE IRA

SIMPLE IRAs have a number of advantages including:

• No administration costs – SIMPLE IRAs offer many of the same benefits as 401(k)s without the costs
• Employers only fund matching – Using a SIMPLE IRA, employers are only required to match employee salary deferrals up to 3%. This is far more cost-effective than a SEP for small business owners with more than 1-2 full-time employees
• Investment flexibility – Like other IRA alternatives, SIMPLE IRAs offer more investment flexibility than most 401(k)s
• Higher contribution limits than Traditional IRAs – Employees can contribute a total of $25,000 per year – $12,500 in deferrals plus another $12,500 from matching, much higher than the $5,500 limit for Traditional IRAs
• No compliance testing – Many retirement plans are subject to annual compliance testing to ensure that contributions and plan assets do not become out of balance. SIMPLE IRAs are not subject to this testing

Cons of a SIMPLE IRA

In addition to their benefits, SIMPLE IRAs also have some drawbacks, including:

• Every employee who earns over $5,000 per year is eligible – Employers must offer SIMPLE IRAs to all eligible employees, which is anyone who has earned over $5,000 in a calendar year and is required to match these employees between 1-3%.
• Mandatory employer contributions – Employers must either (1) contribute 2% of each employee’s salary, whether or not they contribute, or (2) match employee contributions on a dollar-to-dollar between 1%-3% of their salary
• Lower contribution limits than SEP IRAs and 401(k)s – Where SEPs and 401(k)s allow for up to $55,000 in annual contributions, SIMPLE IRA participants are limited to $25,000 in total annual contributions between salary deferrals and employer matching
• Strict deadlines – SIMPLE IRAs must be set up before October 1st of the year they take effect. Unlike some other kinds of IRAs, prior-year contributions are not allowed in SIMPLE IRAs.

2. Choose a SIMPLE IRA Provider

Once you’ve decided on a SIMPLE IRA, setting one up is fairly simple. The first and biggest decision is choosing a provider. The task of choosing a provider is relatively important because different providers have different investment options, fees, and commission structure. What’s more, your provider will typically walk you through the remaining steps to setting up a SIMPLE IRA.

Some of the best SIMPLE IRA providers include Vanguard, Schwab, and Fidelity. As some of the best SIMPLE IRA providers, each offers their own benefits and drawbacks. Let’s now take a closer look.

Vanguard vs. Schwab vs. Fidelity SIMPLE IRA

When deciding on a provider, familiarize yourself with their fee structure, commissions, and available investment options. It’s critical to find the right balance between plan cost and flexibility to achieve your goals. Vanguard, Schwab, and Fidelity are some of the most reputable SIMPLE IRA providers available, but only one will be best for you.

	Vanguard	Schwab	Fidelity
Account Fees	$25/year per fund (waived for clients with over $50,000 in invested assets)	None	$25/year per account
Investment Options	Mutual funds only	Mutual funds, stocks, bonds, ETFs and more.	Mutual funds, stocks bonds, options, ETFs and more.
Transaction Fees	Only if you buy loaded shares. Otherwise, investors are only charged mutual fund expense ratios that average just 0.12% per year	None for Schwab mutual funds $4.95 per US stock trade (buy or sell) $76 per mutual fund purchase (purchase only)	None for Fidelity mutual funds $4.95 per US stock trade (buy or sell) $50 per non-Fidelity mutual fund (purchase only)
Pros	Vanguard has the best low cost mutual funds. Their customer service is also great for beginners.	Completely free to open an account. Wider selection of investments, including stocks	Wider selection of investments, including stocks.
Cons	No stocks, bonds, or ETFs offered for SIMPLE IRAs	Not the best selection of mutual funds. You can invest in non-Schwab funds, but with a $76 fee	Not the best selection of mutual funds. You can invest in non-Fidelity funds, but with a $50 fee
	www.Vanguard.com	www.Schwab.com	www.Fidelity.com

Vanguard SIMPLE IRA

Unlike Schwab or Fidelity, Vanguard is just a mutual fund company – the largest in the world, but still just a mutual fund company. Though Vanguard doesn’t offer any additional services like banking or brokerage services, they have the largest array of in-house mutual funds for account holders to choose from.

If you want to give your employees a “hands off” SIMPLE IRA investment option, Vanguard is the way to go. They’re known for having some of the best and lowest-cost mutual funds with expense ratios as low as 0.12% that are well-diversified and professionally-managed on your behalf. Rather than managing an individual portfolio individual stocks and bonds, employees can invest in just a few mutual funds and let the managers choose specific stocks.

Vanguard is also the best option for target date funds, which are mutual funds designed specifically for retirement. Target date funds are designed to give you the optimal balance of stocks and bonds depending on your age. According to an analysis by BeginToInvest, Vanguard beats out Schwab, Fidelity and T. Rowe Price when it comes to target date funds by having lower fees (expense ratios) and a lower required minimum balance.

Vanguard provides its own customer service online and over the phone – in addition to selling its funds through financial advisors who can help clients one-on-one, but Vanguard can’t give clients the same access to direct in-person advice that Fidelity offers.

If you want to give your employees more control over their investments, such as the ability to trade individual stocks, Vanguard is not a good option. Vanguard SIMPLE IRAs are limited to mutual funds only, whereas Schwab and Fidelity offer a huge range of investments, allowing account holders to trade individual stocks, bonds, or ETFs.

Schwab SIMPLE IRA

Charles Schwab is a diversified financial services company that provides a whole menu of personal and business banking services in addition to securities brokerage, wealth management, and insurance products. While the company doesn’t charge for investing in its own mutual funds, there are charges if you choose to invest in other options.

These charges include:

• Commissions on Trades – Any time you buy, sell, or trade, you’ll be charged a commission starting at $4.95.
• No Commissions on Schwab ETFs – If you only invest in Schwab ETFs, you will not be charged commissions, otherwise, you’ll have to pay any fees specific to the non-Schwab ETF you want.
• Expense Ratio on Funds – While Schwab waives commissions on trading in mutual funds, mutual funds also charge expense ratios to cover the costs of trading and management. While 1.5% is the typical expense ratios for available third-party funds, Schwab’s proprietary index funds have expense ratios of under 0.1% per year.

One of the biggest benefits to account holders is Schwab’s network of offices in numerous communities around the country that are staffed by financial professionals who can provide in-person guidance. If you are interested in using a full-service brokerage firm for your SIMPLE IRA, you’ll find an advantage with Schwab because they have no annual account fees.

Fidelity SIMPLE IRA

Like Schwab, Fidelity is a securities brokerage firm that allows account-holders to invest in securities, providing access to thousands of additional options. Like Schwab, Fidelity also has a nationwide network of offices that Vanguard doesn’t. Fidelity also has lower transaction fees – which is beneficial if you plan to do a lot of trading.

Some of these fees include:

• Commission Fees – $4.95 per trade for US equities, $1 per bond for US bond trades
• International Fees – Commissions for trading stocks in 25 foreign markets that vary by country
• Additional Fees for Wire Transfers and other services – Fidelity charges $10 for cashier’s checks, $15 for returned checks, $10 for bank wires initiated online, and up to 3% for foreign wires
• ETF and Mutual Fund Expense Ratios – Mutual funds and ETFs offered through Fidelity have their own expenses that cover trading and management costs. They start as low as 0.035% for Fidelity Index Funds.

Fidelity also has an array of additional financial services. The downside is this can get complicated for employees who are new to investing, and the costs can quickly add up for those who aren’t careful.

After picking a provider, the rest of the steps are typically included in account applications and other documents, and providers will walk you through them seamlessly. This is why it’s important to choose the best one for your situation.

3. Complete IRS Forms

To establish your SIMPLE IRA, there are various forms you need to fill out. Some are specific to your provider, while the IRS requires to fill out one of 2 specific forms that provide details about your SIMPLE IRA. While you don’t need to submit this form to the IRS, your provider may request a copy.

The 2 IRS forms, of which you’ll need to complete one, include::

• IRS Form 5305-SIMPLE – Choose this form if you plan to set a designated financial institution to receive your employees’ funds. (Most Common)
• IRS Form 5304-SIMPLE – Choose this version if your employees will get to decide where they deposit their funds. (Less Common)

Some of the details you’ll need to disclose include who’s eligible, when you’ll make employer contributions, and what contribution program you’re going to use. In deciding on an employer contribution model, you’ll need to pick between 2 SIMPLE-specific options, including:

• Employer matching – You can choose to match employee salary deferrals dollar-for-dollar up to 3%. You can reduce the match to as little as 1%, but can’t lower then match from 3% for more than 2 of the preceding 5 years
• Nonelective employer contributions – You can contribute 2% of each employee’s pay to their SIMPLE account, regardless of whether they contribute themselves

4. Enroll Employees

SIMPLE IRAs can be established between January 1 and October 1st. Once implemented, all eligible employees must receive plan disclosures including salary reduction options and employer contributions. Page 3 of both IRS documents above provide convenient forms for this purpose.

The pages outline SIMPLE IRA plan details and ask employees for their contribution amounts. Again, you do not need to submit this form to the IRS. You just need to get it filled out, then file it for safekeeping.

Typically, your plan provider will help you through this process, making it quick and painless for you the business owner. When choosing a provider, ensure that they’ll be able to help you enroll all employees so you remain in compliance with the IRS.

“The biggest negative if you have employees is setting up a SIMPLE IRA account for each individual employee. Unlike a 401(k), where there is a master account and the employee is just making an investment election, in a SIMPLE IRA employees have individual accounts – so account set-up is a longer process.” -Richard Reyes, CFP, President, The Financial Quarterback

5. Make Deductions and Matching Contributions

Once your accounts are established, the final step is to set up your payroll system so that it can start making automatic salary deferrals for employees and schedule employer contributions. Remember that employees are contributing pre-tax dollars to their account. You need to deduct payments and send them to your investment provider before you process payroll taxes – otherwise, these deductions will be subjected to payroll taxes.

Whether you choose to match employee deferrals or contribute 2% regardless of employee participation, payroll software can help you to set up automatic contributions. Even if you decide to contribute 2% to each employee (whether they participate or not) you will still need to allow for employee deferrals, that are made easier with software.

Set Up Your Payroll System for Deductions

The easiest way to set up your SIMPLE IRA for automatic contributions is to add this benefit through your payroll system. With a program like Gusto, the system will automatically deduct each employee’s contribution as well as the employer match. The system can also track and stop contributions once you reach your annual limit.

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Alternatives to a SIMPLE IRA

If it seems like a SIMPLE IRA may not be the right fit for your business, be sure to carefully consider some other alternatives. A recent survey showed that 56% of Americans think all IRAs are the same, but contribution limits vary in different plans, as do filing and contribution deadlines, administration costs, and investment flexibility.

SIMPLE IRAs vs SEP IRAs

The contribution limits of a SEP are $55,000 per year – more than twice those of a SIMPLE IRA. In order to use a SEP IRA, employers are required to fund contributions for all employees proportional to their own contributions. Unlike a SIMPLE, prior-year contributions are allowed in a SEP – in fact, they’re standard practice.

SEP IRAs are a great alternative for solopreneurs and small business owners with less than 3-5 employees. If you do not have any employees and are looking to set up a retirement plan just for yourself (or a spouse), consider a SEP IRA. For more information, check out our detailed guide on SEP IRAs.

SIMPLE IRA vs 401(k)

A SIMPLE IRA is often called a poor-man’s 401(k), with good reason. Of the alternatives, SIMPLE IRAs are most like 401(k)s. They both make provisions for employee salary deferrals and employer matching contributions. However, the differences are numerous.

First, the total contribution limits of $55,000 in a 401(k) are more than double the $25,000 allowed in a SIMPLE IRA. Unlike SIMPLE IRAs, employers using a 401(k) have some flexibility in structuring a match, where SIMPLE IRA users must choose between two alternatives. Also, SIMPLE IRAs do not have a provision for profit-sharing contributions.

Lastly, and perhaps most significantly, is the administration cost. SIMPLE IRAs cost virtually nothing to administer, while 401(k)s have expenses related to plan administration, annual testing (to which SIMPLE IRAs are not subject), recordkeeping, and custodian fees – not to mention the costs of matching contributions and any profit-sharing.

Generally, 401(k)s are better for more established companies, whose owners want to contribute more than $25,000 per year and can afford the higher administration costs. However, if you’re okay with the limitations of a SIMPLE IRA, it’s a much easier option for small business owners.

For a low-cost, full-featured, 401(k) plan that is able to grow as you do, consider Spark 401k. Their advisors and customer success managers will help you determine the right plan design, conduct employee education, and answer all your 401(k) questions. The one-time setup fee is $750 and administration costs start at just $100 per month. Get started at Spark 401k.

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SIMPLE IRA vs Traditional IRA

Compared to a SIMPLE IRA, Traditional IRAs have much lower contribution limits – just $5,500 per year, or $6,500 if you’re 50 or older. Where other plans offer options for employer matching or profit-sharing, Traditional IRAs are funded entirely by employees – there is no match or profit-sharing. Employees each have to set up their own; but they can choose their own providers, investment options, and contribution schedule. Prior-year contributions are allowed in Traditional IRAs.

Anyone who is eligible for an employer-sponsored retirement plan is ineligible for a Traditional IRA, except as a supplement if their contributions to an employer-sponsored plan fall short of the Traditional IRA limit. Traditional IRAs are best for independent contractors and small businesses that can’t afford to match employee contributions. They’re also beneficial for business owners who can’t contribute more than $5,500 per year.

The Bottom Line

SIMPLE IRAs are incredibly beneficial retirement plans due to their low cost and relative ease of set up. Employers can even claim a tax deduction of 50% of their eligible startup costs up to $500. Using a SIMPLE IRA, employers can incentivize employee saving by providing matching contributions, as well as ample investment flexibility for participants – all without the administrative costs of a 401(k).