Many physical therapists and occupational therapists are solopreneurs – that is, we have our own business without having any employees.
This business can be your main source of income, or it can be a physical therapy side hustle or occupational therapy side hustle.
In either case, it is important to know which retirement accounts you should consider investing in.
One of your choices is a SIMPLE IRA.
Although it is possible have a SIMPLE IRA without being a solopreneur, this article will be geared specifically towards solopreneurs.
Specifically, this article will cover. . .
- What a SIMPLE IRA is
- Who is eligible for a SIMPLE IRA
- How much can be contributed to a SIMPLE IRA
- When contributions to a SIMPLE must be made
- Why a SIMPLE IRA may or may not be right for you
- And so much more. . .
Ready to learn if a SIMPLE IRA is right for you?
Let’s get started.
What Is A SIMPLE IRA?
The SIMLE IRA is an acronym for a Savings Incentive Match PLan for Employees Individual Retirement Account.
It is a type of account that employers can provide where contributions can be made and invested to help you prepare for your eventual retirement.
How Can I Open A SIMPLE IRA?
Employees are not eligible to open SIMPLE IRAs for themselves – the employer must open it for them.
If you are a solopreneur and thereby act as both the employer and employee, you can use your employer role to open a SIMPLE IRA for employee self.
Who Is Eligible For A SIMPLE IRA?
Employees cannot open a SIMPLE IRA account – it must be opened by an employer.
And there are eligibility requirements for both employers and employees that must be met before a SIMPLE IRA can be opened.
Employers Eligibility Requirements
An employers is eligible to open a SIMPLE IRA for its employee if the employer has no more than 100 employees.
If you are a solopreneur and therefore the only employee of your business, your business is eligible to open a SIMPLE IRA for you.
Employee Eligibility Requirements
Typically, employees must make a minimum of $5,000 in at least one of the last two calendar years and anticipate earning at least $5,000 during the present calendar year as well.
However, these rules are in place to prevent employers from excluding employees from being provided with a SIMPLE IRA when they should be. Therefore, an employer can maintain less restrictive requirements so that they can provide an employee with a SIMPLE even if the employee has not met these requirements.
In other words, if you are a solopreneur, you can still provide yourself (as the employee) with a SIMPLE IRA even if you haven’t met the above income requirements.
How Much Can Be Contributed To A SIMPLE IRA?
There are two types of contributions that can be made to a SIMPLE IRA.
Each type has their own separate contribution limit and requirements on if the contribution must be made each year.
1. An Employee Contribution
When the employee makes a contribution to their SIMPLE IRA, this is referred to as making an “elective salary deferral.”
That’s because the employee doesn’t have to make a contribution to their SIMPLE IRA, so when they do make a contribution they are electing to do so.
Also, by making this contribution, they are choosing to defer taking a portion of their paycheck right now in anticipation that they will realize it (hopefully along with investment gains) later when making a withdrawal.
For year 2022, an employee can contribute up to $14,000 to their SIMPLE IRA.
2. An Employer Contribution
The employer can also contribute to the employee’s SIMPLE IRA.
This is called the “nonelective contribution” because the employer must contribute every year to the employee’s SIMPLE IRA.
There are two possible ways the employer can make this contribution:
- Contributing 2% of the employee’s salary not exceeding a salary of $305,000 for year 2022.
- Matching the employee’s contribution up to 3% of the employee’s salary. Unlike the option above, this option does not keep this limited to a certain salary level.
The employer may choose one of these options one year and then the next year choose the other option instead.
Can More Be Contributed To A SIMPLE IRA If I Am Over 50 Years Old?
Yes.
If you are older than 50 years of age, you can contribute an additional $3,000 to your SIMPLE IRA. This additional amount is referred to as a “catch-up contribution” and is included as part of the employee contribution.
Therefore, if you are more than 50 years in age, you can make a total employee contribution of $17,000 in year 2022.
Can I Have A SIMPLE IRA Even If I Have A Retirement Account Through My Employee Job?
Yes.
If you have a SIMPLE IRA through your employer for one employee job, you can still work as an employee at a second job for a different employer and have another retirement account through that second employer.
However, your contributions cannot surpass the federally regulated elective deferral contribution limit which is $20,500 in year 2022.
For example, let’s say you are a physical therapist who works for an employer in an acute care hospital setting. Through this job your employer provides you with a 401(k).
However, you also have your own a physical therapy side hustle business. Through this job, your employer (your business) provides you with a SIMPLE IRA.
The amount that you, as the employer, contribute to both the 401(k) and the SIMPLE IRA in total cannot surpass limit of $20,500 in year 2022.
Since the SIMPLE IRA employee contribution limit in year 2022 is $14,000 you can hypothetically contribute $14,000 to your SIMPLE IRA and then $6,500 to your 401(k) for a total employee contribution of $20,500.
Do I Need To Contribute To A SIMPLE IRA Every Year?
No, you as the employee do not need to make an employee contribution to your SIMPLE IRA each year.
However, your employer is required to make an employer contribution to your SIMPLE IRA each year.
But if your employer is following the employer contribution of option of matching the employee’s contribution up to 3% of the employee’s salary and you as the employee don’t make a contribution, then the employer doesn’t have anything to match and can also get away with not making a contribution.
However, if you are a solopreneur, you don’t need to worry about this as you are both the employee and the employer.
Is There A Deadline For When A Contribution To A Simple IRA Must Be Made?
Yes.
The IRS has separate rules for when the employee contribution and the employer contributions must be made.
Employee Contribution
The employee’s contribution must take place within 30 days from the month in which you want to claim the contribution was made.
For example, if you want to make an employee contribution in May 2022, the contribution must be deposited in your SIMPLE IRA by the end of June 2022.
If you want to make an employee contribution in December 2022, the contribution must be deposited in your SIMPLE IRA by the end of January 2023.
Employer Contribution
The employer contributions must all be made by the day you pay your taxes.
In other words, all employer contributions for year 2022 must be deposited into your SIMPLE IRA by April 15, 2023 unless you file a tax extension which would usually push the date to October 15, 2023.
How Do Taxes With A SIMPLE IRA Work?
As with many other retirement accounts, there is a tax incentive when making contributions to a SIMPLE IRA.
Employee Contribution
Your employee contribution must be made on a pre-tax basis.
That means you will hold off on paying federal income tax on the amount you will contribute to your SIMPLE IRA and you will receive a federal tax deduction for your contribution to your SIMPLE IRA.
When the time comes for you to withdraw money from your SIMPLE IRA, you will have to pay federal income taxes on that withdrawn amount.
Employer Contribution
Like the employee contribution, your employer contribution must also be made on a pre-tax basis.
That means the employer will hold off on paying federal income tax on the amount it will contribute to your SIMPLE IRA and your employer will receive a federal tax deduction for your contribution to your SIMPLE IRA.
When the time comes for you to withdraw money from your SIMPLE IRA, you will have to pay federal income taxes on that withdrawn amount.
Does A SIMPLE IRA Have A Roth Option?
No.
Unlike some other retirement accounts, there is no Roth option with a SIMPLE IRA.
Roth is simply the name given to describe the option of paying federal income tax on the amount you will contribute to your retirement account so that you will not have to pay federal income tax when eventually making a withdrawal.
You do not have this option with a SIMPLE IRA – all contributions must be made pre-tax.
Are There Any Rules For Withdrawing Money From A SIMPLE IRA?
Yes.
In addition to what was covered in the tax section above, there are more rules you must follow.
Withdrawing When Too Young
If you make a withdrawal from your SIMPLE IRA account before you turn 59 ½ years old, you will have to pay the IRS 10% of that withdrawn amount as a penalty.
Withdrawing Soon After Opening
If you make a withdrawal from your SIMPLE IRA in two years or less from when you opened the SIMPLE IRA account, you will have to pay the IRS 15% of that withdrawn amount as a penalty.
If you make this withdrawal before you are 59 ½ years old, you’ll have to pay a 25% penalty (10% + 15%).
Required Minimum Distributions
You must take a Required Minimum Distribution when you turn 72 years old.
Can I Rollover The Balance Of My SIMPLE IRA?
You can rollover the balance of your SIMPLE IRA into another SIMPLE IRA account without penalty.
Otherwise, rolling over the balance of your SIMPLE IRA into any other type of account will result in paying the IRS a 25% penalty on the amount you rolled over.
How Can I Open A SIMPLE IRA?
Opening a SIMPLE IRA has a reputation of being, well, simple.
Solopreneur physical therapists and occupational therapists can follow these three steps to open a SIMPLE IRA:
1. Pick A Brokerage
Decide which brokerage you would like to use as your provider.
Here are some examples of brokerages:
– Vanguard
– Fidelity
– Schwab
Be selective in choosing your brokerage – make sure they provide the investment options you want and be aware of any fees they make charge.
2. Fill Out The Paperwork
Solopreneurs can either fill out Form 5304-SIMPLE or Form 5305-SIMPLE.
Form 5304-SIMPLE is used when the employer is allowing the employee to choose the brokerage they want to use as the provider of their SIMPLE IRA while Form 5305-SIMPLE is used when the employer makes this decision.
As the solopreneur, though, this makes little difference unless you plan on hiring employees in the future.
3. Open The Account
Now that you have chosen your brokerage and signed the paperwork, you can open your own SIMPLE IRA account.
You will need to do this during the current tax year but before October 1st. If you started your business after October 1st, though, the IRS does give some leeway with this so you won’t have to wait until the next year to open a SIMPLE IRA.
Can I Take Out A Loan On My SIMPLE IRA?
No.
The IRS does not allow loans to be taken out against your SIMPLE IRA balance.
Can I Do A Backdoor Roth IRA If I Have A SIMPLE IRA?
The balance of a SIMPLE IRA is included in the calculation used to perform a Backdoor Roth IRA rollover.
This can interfere with being able to perform with such a rollover.
Final Thoughts. . .
Overall, the SIMPLE IRA appears to have more negatives than positives for solopreneur physical therapists and occupational therapists.
While you do have the opportunity to get a tax deduction for making contributions to your SIMPLE IRA, that’s common with other retirement accounts too. And you don’t have the option to contribute to a SIMPLE IRA on an after-tax Roth basis, but you do with some other retirement accounts.
The contribution limits also leave a lot to be desired. Yes, they are higher than what a traditional IRA offers, but far less than what you can contribute towards either an individual 401(k) or a SEP IRA.
You do get a catch-up contribution if you are more than 50 years old, but even then you still can’t come close to what you can contribute to an individual 401(k) or a SEP IRA.
Some may point out that a nice feature of a SIMPLE IRA is that the employer must contribute to your SIMPLE IRA each year. But if you are a solopreneur, this point is not relevant since you are both the employer and the employee and thus already have control over if and how much your business will contribute to your SIMPLE IRA.
So why would a solopreneur physical therapists or occupational therapist ever want to open a SIMPLE IRA?
Well, a SIMPLE IRA is easy to set up.
It also has the reputation of being cheap to both set-up and maintain.
But once you start contributing to a SIMPLE IRA, you better be happy with having a SIMPLE IRA because you’re balance likely won’t be leaving that SIMPLE IRA account since your flexibility with a SIMPLE IRA is also quite limited.
You are not allowed to rollover that balance into a different type of retirement account without incurring a large penalty, unless that retirement account is another SIMPLE IRA.
And you’re not even are not allowed to take out a loan against that balance.
Before making any decisions, though, speak to your trusted tax professional.
Are you a solopreneur? Do you have a SIMPLE IRA or a different retirement account? Why did you choose the retirement account that you have? Let me know if the comments section below!
