A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan. It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, including solo 401(k)s and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored, and like other IRAs, they give employees some flexibility in choosing their investments.
SIMPLE IRA contribution limits are one of the main differences between accounts, meaning how much individuals can contribute themselves, and whether there’s an employer contribution component as well.
Here’s a look at the rules for SIMPLE IRAs,and how to pair a SIMPLE IRA with a traditional or Roth IRA.
Related: A guide to self-directed IRAs
SIMPLE IRA Basics
SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or fewer.
Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so as a way to save for retirement.
Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year. An employee’s income doesn’t affect SIMPLE IRA contribution limits.
SIMPLE IRA Contribution Limits, 2020 and 2021
Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.
Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax-deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty-free at age 59-and-a-half. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.
Employee contributions are capped. For 2020 and 2021, contributions cannot exceed $13,500 for most people. Employees who are age 50 and over can make additional catch-up contributions of $3,000, bringing their total contribution limit to $16,500.
Employer vs Employees Contribution Limits
Employers are required to contribute to each one of their employee’s SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.
There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.
If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years. If an employee doesn’t contribute to their SIMPLE account, the employer does not have to contribute either.
Now let’s consider the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well. Contributions are limited. Employers may make a 2% contribution up to $290,000 in employee compensation for 2021 ($285,000 for 2020). (The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)
Whatever contributions employers make to their employees’ plans are tax-deductible. And if you’re a sole proprietor, you can deduct the employer contributions you make for yourself.
SIMPLE IRA vs 401(k) Contribution Limits
There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.
Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax-deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59-and-a-half.
Contribution limits for 401(k)s are much higher than for SIMPLE IRAs. In 2021, individuals can contribute up to $19,500 each year to their 401(k) plans. Plan participants age 50 and older may make $6,500 in catch-up contributions for a total of $26,000 per year.
Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.
Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions can equal up to $58,000 per year, or 100% of an employee’s compensation, whichever is less. For those age 50 and older, that figure jumps to $64,500.
As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA.
SIMPLE IRA vs Traditional IRA Contribution Limits
Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional or Roth.
Traditional IRAs
When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2021, individuals can contribute $6,000, or $7,000 for those 50 and older. That said, when paired with a SIMPLE IRA, individuals could be making $19,500 in total contributions, the same as with a 401(k).
Roth IRAs
Roth IRAs work a little bit differently. Contributions to Roths are made with after-tax dollars. Money inside the account grows tax-free and individuals pay no income tax when they make withdrawals after age 59-and-a-half. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.
Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts. (Want to learn more about IRAs? Check out these frequently asked questions.)
The Takeaway
SIMPLE IRAs are an easy way for employers and employees to save for retirement, especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.
While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Guide to Bitcoin IRA: Pros, cons & what to know
A Bitcoin IRA (individual retirement account) is a self-guided retirement account that holds Bitcoin in its portfolio. Typically, most IRAs invest in stocks, bonds, or precious metals. A Bitcoin IRA invests in Bitcoin, and perhaps several different types of cryptocurrency.
There is no official designation for a Bitcoin IRA or Bitcoin Roth IRA by the IRS or any other regulatory agency—the term “Bitcoin IRA” simply refers to an IRA that includes Bitcoin.
Related: How to invest in Bitcoin
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A cryptocurrency IRA could provide some unique benefits, including offering overall portfolio diversification, and potentially unheard of price appreciation.
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Bitcoin provides a unique way to diversify an individual’s overall investment portfolio.
Given Bitcoin’s extreme outperformance of all other asset classes over the last ten years, it’s often said that Bitcoin is “uncorrelated” with the rest of the investment world. While that trend was upended in early 2020 as Bitcoin experienced a positive correlation with the S&P 500, some investors still consider it a more volatile investment.
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Given the unparalleled price appreciation bitcoin has enjoyed to date, along with the fact that cryptocurrency is an uncorrelated asset class and exists outside the control of any single centralized authority, some investors have wondered if it could be a reasonable retirement option.
There have been periods when Bitcoin traded in tandem with stocks, but from 2009 to 2020, Bitcoin has had over a 1,000,000% price increase (from less than $0.01 to more than $10,000). By comparison, the S&P 500 index provides an average return of 8% annually. That said, past performance is never a guarantee of future returns.
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There are also potential drawbacks to holding investments in a Bitcoin IRA, including both volatility and fees.
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Bitcoin has shown extreme volatility at times. This is one of the main reasons the asset class is considered risky by some, although this perception has begun to change recently.
The list of large corporations (like PayPal, Square and MicroStrategy) and self-made billionaires announcing large investments in bitcoin continues to grow. Successful billionaire investors like Paul Tudor Jones and Stanley Druckenmiller believe that Bitcoin’s overall value proposition outweighs its volatility.
Still, for investors with low risk tolerance, volatility could be a big drawback. Seeing investment funds fall by ten or twenty percent (or more) in a single day can be too much for some people.
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Perhaps the biggest and most assured drawback of investing in a Bitcoin IRA would be the fees involved.
Setting up an account alone could cost thousands. Every trade engaged in on an investor’s behalf could also come with fees in excess of 1% per trade.
And as with other IRAs, withdrawing funds before retirement results in additional fees and taxes.
Taken together, the final taxes and fees could eat into a portion of the profits and tax advantages earned by a Bitcoin IRA.
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The main way to invest in a bitcoin IRA is to use a trusted service provider that helps investors establish IRAs that hold Bitcoin.
There are some companies that have partnered with bitcoin custodial services like BitGo, for example, to help safeguard funds for investors—although these companies cannot guarantee against loss.
The specific process for starting a bitcoin IRA might vary according to which provider an individual chooses.
A Bitcoin IRA provider can help investors buy cryptocurrency to add to their portfolio while also safeguarding the funds for them.
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A cryptocurrency IRA works much like any other IRA. It’s a retirement account that invests in Bitcoin. The main difference for most customers is they will likely be interacting with three different entities:
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These are the companies an individual will deal with when they want to add Bitcoin to their IRA. They are the financial rails through which assets will be converted into Bitcoin.
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These are usually banks, credit unions, or brokerages that hold the assets in an IRA. Traditional IRAs invest in stocks and bonds, but self-directed IRAs allow investors to hold other assets like gold, real estate, or cryptocurrency.
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Typically, a Bitcoin IRA service will have a partnership established with a trusted wallet provider or custody solution that securely holds the private keys to a customer’s Bitcoin funds.
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The answer to this question is “maybe, but probably not.”
401(k) plans generally don’t allow for the direct purchase of cryptocurrency. There are potential ways to roll over a portion of 401(k) funds into Bitcoin, but the easiest way might still be to use a self-directed IRA.
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The answer to this question depends on how a Bitcoin IRA company stores the private keys to an investor’s crypto.
It is widely acknowledged that to be truly safe, keys must be held off-line in cold storage and secured using some kind of multi-signature (multi-sig for short) method. This means that the funds can’t be accessed by any hacker on the internet, and that multiple access methods are required to retrieve any funds.
Multi-sig works kind of like a safety deposit box, where there are two physical keys—one held by the bank and one held by the customer.
Multi-signature security means that there must be at least two means of user verification before funds can be accessed. A basic example would be a customer having to answer emails from two separate email accounts.
More complicated methods might involve some kind of photo or voice identification in addition to multiple emails and an additional key held by the custodian of the funds.
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As far as investment gains or losses are concerned, investors will have to decide for themselves whether or not long-term bitcoin investing is safe in terms of their comfort level and their goals. The technology is only 11 years old at the time of writing.
There’s always a chance, however slim, that the project could fail. That said, the prospect of incredible returns seems to sway more and more investors.
Since 2009, the price of one Bitcoin in US dollar terms has risen well over 1,000,000%, making Bitcoin the best performing asset of the decade—and in history.
While past performance is never a guarantee of future outcomes, if this trend were to continue, it could potentially mean substantial returns for investors over the long term.
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A Bitcoin IRA or Bitcoin Roth IRA is an individual retirement account that holds bitcoin. Instead of a traditional IRA that holds stocks and bonds, a Bitcoin IRA is a self-directed IRA that can hold a variety of assets like gold, real estate, or Bitcoin.
In recent years, several service providers have stepped in to fill the market need for people wanting to add bitcoin to their retirement accounts. While the process is relatively straightforward, one of the major drawbacks that might turn many investors off could be the potential high fees involved.
Learn More:
- Guide to crypto staking: What it is, how it works, and how to get started
- Popular terms every crypto beginner needs to know
This article
originally appeared on SoFi.comand was
syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB . PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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