When you hear about investing with Self-Directed IRAs, you might hear about conventional accounts like Traditional IRAs, Roth IRAs, and Solo 401(k) plans. But the SIMPLE IRA isn’t always intuitive for new investors. However, it might be exactly what fits with you and your situation. How do you know? You have to know what makes the Self-Directed SIMPLE IRA so different, and who it applies to. That’s why we’ve put together a brief guide on understanding why the SIMPLE IRA is so different, and what that means for you.
What Distinguishes the SIMPLE IRA from Other Accounts
Perhaps the most distinguishing characteristic of the Self-Directed SIMPLE IRA is that it is for employers with a limited number of employees. In other accounts, such as the Roth IRA or the Solo 401(k), you might not have any employees at all. But if you’re self-employed with a business and want to create a retirement benefits package for your employees, you may need an option like the SIMPLE IRA to handle it.
A Self-Directed SIMPLE IRA, which stands for a Savings Incentive Match Plan for Employees, is a tax-favored retirement plan for eligible small businesses, which may include self-employed individuals. You can set this up for the benefit of your employees, which is a key characteristic that defines it and separates it from some of the other available retirement account types.
How does it work? With a SIMPLE IRA, employees can choose to contribute up to the allowable limit. Employers have the obligation of contributing to the plan by matching these employees’ contributions dollar for dollar up to 3% of the employee’s compensation. An employer may also contribute 2% of compensation with no matching. These contributions will go directly to the IRA held by the employee, which gives them a lot of freedom for choosing how they want their investments to look.
What Can a Self-Directed SIMPLE IRA Do?
To better understand what makes the Self-Directed SIMPLE IRA different, it’s easier to explain what it can do if you use it the right way.
The Self-Directed SIMPLE IRA, for example, can work with businesses that have fewer than 100 employees. For this reason, it’s often a favorite of small businesses who want to build a retirement package for their employees, but don’t have the resources of a large conglomerate.
The SIMPLE IRA is also a plan with low start-up and administration costs, which means that it’s great for businesses that have to maximize every retirement dollar. Because it’s so straightforward to maintain, there’s no reason that a SIMPLE IRA has to eat at the budget of a business. Instead, it’s easy to keep going without throwing a lot of money towards its administration or maintenance.
There is also the flexibility of the account to consider. Because SIMPLE IRA users might not always have a mega-budget to put towards retirement, the flexibility with which the SIMPLE IRA makes contributions possible is an important feature. It means that there are plenty of options for investors who are using a Self-Directed SIMPLE IRA.
A Self-Directed SIMPLE IRA can sometimes sound like an oxymoron. But once you get into it, you’ll realize that it really can be simple and straightforward to use. It simply requires knowing the qualifications, and what sorts of situations call for a SIMPLE IRA. To learn more about Self-Directed SIMPLE IRAs for small businesses, you can look at our Self-Directed SIMPLE IRA section.