First of all, the description term “Self-Directed Simple IRA” is not intended to imply that you would choose this program because it is easier to establish and/or to administer. This is to describe another form of an employer-based IRA from which participants who qualify can invest their retirement funds on their own.
This option is considered to be ideal for companies with fewer than 100 employees, including any part-timers.
To get started, there are now three ways to provide the initial funds. You can use one, two, or all of these methods. The account holder may make a contribution, an employer can make a contribution, and/or the account holder is allowed to transfer funds from another Self-Directed Simple IRA (whether the other Simple IRA is Self-Directed or not).
Moving forward, an employer can choose to match up to 3% of each employee’s compensation OR to contribute 2% for each employee.
There is a degree of strategy with regard to an employer’s choice.
Choosing the 2% for each employee, whether an employee contributes to their own account or not, enables the business ownership to determine the exact amount of the contribution based on the compensation structure.
On the other hand, matching up to 3% would most likely increase the amount of the contributions, especially if most or all of the employees choose to contribute at least 3% of their compensation to their accounts. Since employer contributions to a Self-Directed Simple IRA are deductible as a business expense, an employer choosing this option would likely face a greater tax advantage by doing so.
You should consult with your tax professional prior to making this decision. However, funds in the account of an employer, as well as all participating employees, offer the same tax benefits as a Traditional IRA does.
A business owner (employer) gains several advantages by offering a Self-Directed Simple IRA. The start-up and ongoing administrative and managing costs are generally lower than for offering a Traditional 401K plan. In addition, the contributions can be implemented as an additional payroll deduction, which saves administration of separate checks and bookkeeping chores.
At the same time, this provides an employee benefit and incentive for staying with the business, while potentially reducing business taxes.
Each participating employee under this plan also gains advantages. He or she is able to choose the amount (percentage) to contribute to their plan on a regular basis. Having the employer match or contribute to their plan adds to their contribution each year and helps their funds grow for the long term.
While in operation, the business owner has the ability to use its funds to invest in real estate, precious metals, notes, technology, or any other appropriate investing. Such investments can be on a short or long-term basis, or as a mixture.
For example, a business owner could purchase and flip two properties each year, with the profits feeding into the Self-Directed Simple IRA each time tax-free. Or, he/she could purchase a rental property and have the monthly positive cash flow feed into the account every month for years to come.
Each participating employee can also make investments in the same categories as they wish, and with the added benefit of the employer matching or contributing to their funds as scheduled.
Participating employees have one other potential benefit. Upon a Self-Directed Simple IRA being in existence for two years, the account holder becomes eligible to rollover the funds into another retirement account.
Suppose “Jenny” works for XYZ Corporation, which is matching 3% of her contribution, for five years. She was able to invest and increase her funds as well.
She decides to leave XYZ Corporation for another position. Because she held her account for more than the required two years, she would be able to immediately transfer all of her funds from this Self-Directed Simple IRA into another Self-Directed (or Traditional) IRA of her choosing, perhaps merging it with other funds for an even larger impact.
This is another way that this program fits into your long-term retirement strategy!