The Self-Directed SIMPLE IRA for Small Business Owners (2024)

A Savings Incentive Match Plan for Employees (SIMPLE IRA) is a retirement that is ideal for small businesses with less than 100 employees as well as for self-employed individuals. It’s cost-effective to implement and easy to manage. A self-directed SIMPLE IRA offers the same features as a typical SIMPLE plan and is governed by the same rules. However, self-directed plans can invest in real estate, cryptocurrency, private lending, and other alternative assets that aren’t available to the typical plan.

In other words, self-directed SIMPLE plans aren’t limited to stocks and bonds. Instead, account owners have the freedom and flexibility to invest in a wide range of alternative investments to the stock market. This provides great diversity and the potential of higher returns in their retirement portfolios.

Read on to learn what a self-directed SIMPLE IRA is and how it works. We’ll explain the benefits, eligibility requirements, rules, and annual contribution limits. Most importantly, we’ll cover many of the alternative assets available to self-directed accounts.

What are the Benefits of a SIMPLE IRA?

A SIMPLE IRA is a retirement plan with an employer matching contribution option that provides perks for both employers and employees. The ability for an employer to offer retirement benefits is an advantage that helps attract and retain employees. The opportunity to have an employer-sponsored plan that offers contributions by employers is a huge plus for employees. Business owners can make contributions as both an employer and an employee. But the advantages don’t end there.

Key benefits

• • Inexpensive to set up and easy to maintain.
  • Any small business with less than 100 employees can offer this plan.
  • Ideal plan for self-employed individuals.
  • Sole proprietors (Schedule C income tax filers) can make contributions as both an employer and employee.
  • Employers have the flexibility to offer matching contributions of up to 3% of an employee’s compensation OR a 2% nonelective contribution.
  • Contributions are pre-tax and earnings grow tax free; distributions are taxed in retirement.
  • There may be tax benefits for businesses and employees who use SIMPLE IRAs.*
    • For employers, this depends on the number of employees a business has and if they have autoenrollment set up.
    • For employees, tax benefits are based on their income.
  • A Roth designation for contributions is available, which would allow tax-free distributions in retirement.

*To determine any tax benefit or tax credit eligibility, consult with your CPA or other tax professional.

SIMPLE IRA contribution rules

Contributions are determined based on how the employer sets up the plan—offering either a match or a nonelective contribution to employee plans:

Matching contributions:

• • The employer matches the employee’s contribution dollar-for-dollar up to 3% of their compensation.
  • If you don’t contribute to your plan, your employer doesn’t contribute to your plan, either.

Nonelective 2% contribution:

• • The employer contributes 2% of the employee’s compensation to their plan.
  • This contribution is made even if the employee doesn’t contribute to their plan.

What Is a Self-Directed SIMPLE IRA?

Self-directed SIMPLE IRAs are not different than their conventional counterpart—they are governed by the same IRS rules and offer the same basic benefits.

But there are two advantages a self-directed SIMPLE IRA has that the typical SIMPLE plan does not:

1. 1. Self-directed SIMPLE IRAs have access to thousands upon thousands of alternative investments to the stock market, while typical plans are limited stocks, bonds, and mutual funds.
   2. Account owners choose their investments based on their own knowledge and expertise instead of the plan administrator or another third party.

This is huge. Especially if you understand how critical it is to have diversity in your retirement portfolio. Alternative assets add that diversity and have the potential to offset losses on the market when stocks and bonds suffer drops. You call the shots and choose your investments—you can buy and sell when you want to and invest within your comfort zone.

What Are Alternative Investments?

Self-directed plans can certainly invest in stocks and bonds and other Wall Street offerings. But the reason smart individuals self-direct is to have the freedom to invest off the stock market to build wealth for retirement. The alternative investment asset class is broad and includes some popular and unique opportunities you may not know existed.

Examples of popular alternative investments:

• • Fix-and-flip property
  • Single-family rentals
  • Multifamily property (duplexes, condos)
  • Mobile homes and mobile home parks
  • Commercial real estate (office space, malls, restaurants)
  • Unimproved land
  • Foreign real estate
  • Multifamily syndications
  • Real estate syndications
  • Private mortgages
  • Tax liens
  • Private equity
  • Gold
  • Cryptocurrency
  • Startups and distressed businesses
  • LLCs, LLPs, and other partnerships

These are just a few assets you can invest in with a self-directed SIMPLE IRA. You can acquire anything you can imagine except for life insurance and collectibles. Those are the only assets prohibited in self-directed accounts per the IRS. Other than that, the world is your oyster—whatever you think can turn a profit can be purchased by your self-directed account to build tax-advantaged wealth for your golden years.

Contribution Limits for SIMPLE IRAs

In 2023, employees can defer up to $15,500 of their salary, and those 50 and older can make a catch-up contribution of an additional $3,500.

If an employer matches salary deferrals, they can match between up to 3% of an employee’s compensation.

If the employer chooses to make non-elective contributions, they contribute 2% of employees’ compensation to their plans.

Who Can Use a Self-Directed SEP IRA?

Several different types of businesses and organizations can use this plan if they meet the 100-employee rule.

• • Self-employed individuals
  • Employers
  • Tax-exempt organizations
  • Governmental entities

Per IRS rules to establish a SIMPLE IRA, in the previous year, you must not have had more than 100 employees who earned $5,000. This includes all employees you had in that preceding year, even if they didn’t meet eligibility requirements.

Employee Eligibility for SIMPLE IRA Participation

Employees are eligible to participate in a SIMPLE IRA as long as they received a minimum of $5,000 in compensation from the employer during two preceding calendar years (consecutive years is not a requirement). Additionally, the employees must reasonably expect to make at least $5,000 during the current calendar year. Employers are able to lower the minimum compensation requirement to enable eligibility, but they may not raise that limit higher than $5,000.

All employees who received at least $5,000 in compensation from you during any two preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, are eligible to participate in the SIMPLE IRA plan for the calendar year.

Is a Self-Directed SIMPLE IRA the Right Plan for You?

If your business meets the above criteria and you want to offer your employees retirement benefits with the added bonus of investing in alternative assets, a self-directed SIMPLE IRA is worth consideration. If you have questions about self-direction and alternative investments, please contact Advanta IRA. Our goal is to inform and empower individuals and small business owners to take control of their retirement funds and investing decisions—and we welcome the opportunity to explain it to you.