Its common sense that saving for a retirement is a must, but many people decide to put it off. Many individuals may just not know what retirement vehicle they should park their money in. Most of us are probably familiar with a 401(k) but If you work for a small business, chances are you have an opportunity to kickstart your retirement goals by opening a SIMPLE IRA. A SIMPLE IRA offers advantages that are superior to other employer-sponsored retirement plans and it is important for an individual to determine if a SIMPLE IRA is the right approach for them to attain their retirement goals.
Savings are Tax-Deferred
As with many employer-sponsored retirement plans, employees who elect to open a SIMPLE IRA can defer a share of their income and grow the funds without paying any income taxes until they receive distributions at retirement. This means their money will compound at a higher rate. Taxes can eat away at an investor’s initial rate of return and being able to postpone taxes will enable an individual to retire with a larger lump sum in their retirement account.
Once an employer matches a contribution, the funds belong to the employee and are theirs even if they leave the company, regardless of how long they were employed. Most plans with employer matching require the employee to have served with the company for a specified amount of time before they can claim ownership of the matching employer contribution.
Companies that offer SIMPLE IRA’s to their employees can receive a tax credit. Employees are also eligible for a nonrefundable tax credit for up to $2,000 of yearly contributions provided their incomes are below a specific threshold.
While a 401(k) can be a great retirement plan, they can be somewhat frustrating for individuals who want to choose how to invest their hard-earned money. Most 401(k) plans offer a limited number of investment options. In SIMPLE IRA’s contributions can be invested in individual stocks, mutual funds, CD’s, ETF’s and a broad range of investment tools, allowing the owner more control over their retirement. The simple IRA gives you the discretion to place your funds where you see fit.
High Contribution Limits
A Simple IRA allows individuals to contribute up to $12,500 of their income per year and allow an additional $3,000 if you are over the age of 50. This is substantially higher than a traditional or a Roth IRA, whose contribution limits are only $5,500 per year. The higher contribution limits will enable the invested capital to compound much more aggressively.
No Loan Provision
Many retirement plans offer an individual an option to borrow from their retirement account and then pay it back. Some may see this as a bad thing. However, the most important function of any retirement account is to allow an individual to create a tax shelter for their retirement funds it can also be tempting to borrow from a 401k because of the convenience, which defeats the purpose of saving for retirement.