IRS Form 5304-SIMPLE vs. Form 5305-SIMPLE: Which to Choose for SIMPLE IRA Setup?

If you're a small business owner looking to set up a retirement plan for yourself and your employees, you may have come across the SIMPLE IRA plan.

This plan is designed for businesses with 100 or fewer employees and offers a simplified way to save for retirement.

However, setting up a SIMPLE IRA plan requires some paperwork, including choosing between IRS Form 5304-SIMPLE and Form 5305-SIMPLE.

Both Form 5304-SIMPLE and Form 5305-SIMPLE are IRS forms that can be used to establish a SIMPLE IRA plan.

The main difference between the two forms is how contributions are deposited. If you use Form 5304-SIMPLE, your employees will be able to choose the financial institution where their contributions will be deposited.

If you use Form 5305-SIMPLE, you will choose the financial institution where all contributions will be deposited.

Choosing between these two forms may seem like a small detail, but it can have a big impact on your employees' retirement savings.

In this article, we'll explore the differences between Form 5304-SIMPLE and Form 5305-SIMPLE, and help you decide which one is right for your business.

What are SIMPLE IRAs?

If you are a small business owner, you might be looking for a retirement plan for your employees that is easy to set up, maintain, and administer. A SIMPLE IRA (Savings Incentive Match Plan for Employees) might be the solution you are looking for.

Understanding SIMPLE IRAs

A SIMPLE IRA is a type of retirement plan that allows small businesses to offer their employees a way to save for retirement. It is similar to a traditional IRA but with a few important differences.

For example, with a SIMPLE IRA, both the employer and the employee can contribute to the plan. The contributions are tax-deductible, and the earnings on the contributions grow tax-deferred until they are withdrawn.

To set up a SIMPLE IRA, the employer must use either Form 5304-SIMPLE or Form 5305-SIMPLE.

These forms are provided by the IRS and can be used to establish a SIMPLE IRA plan. The employer must also choose a financial institution to hold the plan assets.

Benefits of SIMPLE IRAs

There are several benefits to offering a SIMPLE IRA plan to your employees. First, it is easy to set up and administer.

Second, both the employer and the employee can contribute to the plan, which can help attract and retain employees.

Third, the contributions are tax-deductible, which can help reduce the employer's tax burden.

Fourth, the plan assets are held in individual accounts, which means that each employee has control over their own retirement savings.

Here are some of the key features of a SIMPLE IRA:

  • Employer contributions are required: The employer must contribute either a matching contribution (up to 3% of the employee's compensation) or a 2% non-elective contribution for each eligible employee.
  • Employee contributions are optional: Employees can choose to contribute up to $13,500 (in 2021) of their own money to the plan.
  • Catch-up contributions are allowed: Employees who are 50 or older can make catch-up contributions of up to $3,000 (in 2021).
  • Withdrawals are subject to penalties: Withdrawals made before age 59 1/2 are subject to a 10% penalty, in addition to ordinary income taxes.
  • Loans are allowed: Employees can take out loans against their SIMPLE IRA, up to a maximum of $50,000 or 50% of their account balance, whichever is less.

Overall, a SIMPLE IRA can be a great option for small businesses that want to offer a retirement plan to their employees without the complexity and expense of other types of plans.

IRS Form 5304-SIMPLE

Overview of Form 5304-SIMPLE

Form 5304-SIMPLE is a model document that can be used by employers to establish a SIMPLE IRA plan.

A SIMPLE IRA plan is a type of retirement plan that is designed for small businesses with 100 or fewer employees.

It allows employees to make contributions to their own retirement accounts and requires the employer to make either matching or non-elective contributions to the employees' accounts.

Form 5304-SIMPLE is designed to be used by employers who want to allow their employees to choose the financial institution where their SIMPLE IRA contributions will be deposited.

The form includes a section for the employer to specify the financial institution options that are available to employees.

When to Use Form 5304-SIMPLE

Form 5304-SIMPLE should be used by employers who want to offer their employees the option to choose the financial institution where their SIMPLE IRA contributions will be deposited.

This form is a good choice for employers who want to give their employees more control over their retirement savings.

Employers who use Form 5304-SIMPLE must also use a prototype or individually designed plan document that meets IRS requirements.

The prototype or individually designed plan document must be submitted to the IRS for approval before it can be used to establish a SIMPLE IRA plan.

Overall, Form 5304-SIMPLE is a good choice for employers who want to offer their employees a SIMPLE IRA plan with more flexibility and control over their retirement savings.

IRS Form 5305-SIMPLE

Overview of Form 5305-SIMPLE

Form 5305-SIMPLE is a model document used to establish a Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account (IRA).

This form is provided by the Internal Revenue Service (IRS) to help small business owners set up a SIMPLE IRA plan for their employees.

The form includes the basic provisions required to establish a SIMPLE IRA plan. It also includes a designated financial institution where all contributions under the plan must be initially deposited.

This form is intended for use by employers who require all contributions under the SIMPLE IRA plan to be initially deposited at a financial institution they designate.

Form 5305-SIMPLE is a straightforward document that can be easily completed by employers. It includes all the necessary information to set up a SIMPLE IRA plan, including the contribution provisions, eligibility requirements, and distribution rules.

When to Use Form 5305-SIMPLE

Form 5305-SIMPLE is suitable for small business owners who want to establish a SIMPLE IRA plan for their employees, but do not want to allow employees to select the financial institution where their contributions will be deposited.

This form is also suitable for employers who want to establish a SIMPLE IRA plan quickly and easily, without the need for professional assistance.

If you want to allow your employees to select the financial institution where their contributions will be deposited, you should use Form 5304-SIMPLE instead.

This form allows employees to choose the financial institution where their contributions will be deposited, and it also includes all the necessary provisions to establish a SIMPLE IRA plan.

In summary, Form 5305-SIMPLE is a model document provided by the IRS to help small business owners establish a SIMPLE IRA plan for their employees.

It is a straightforward form that includes all the necessary provisions to set up a SIMPLE IRA plan quickly and easily.

If you want to allow your employees to select the financial institution where their contributions will be deposited, you should use Form 5304-SIMPLE instead.

Comparison of Form 5304-SIMPLE and Form 5305-SIMPLE

If you are a small business owner who wants to set up a SIMPLE IRA plan for your employees, you will need to choose between Form 5304-SIMPLE and Form 5305-SIMPLE.

Both forms are used to establish a Savings Incentive Match Plan for Employees (SIMPLE) IRA, but there are some key differences between the two forms that you should be aware of before making your decision.

Key Differences

The main difference between Form 5304-SIMPLE and Form 5305-SIMPLE is the level of responsibility that you, as the employer, will have in administering the plan.

Here are some of the key differences:

Form 5304-SIMPLEForm 5305-SIMPLE
You cannot impose any other requirements or conditions on your employees to receive contributions under the plan.You can require that employees have worked for you for a minimum amount of time before they are eligible to participate in the plan.
You cannot use the form if you currently maintain any other qualified retirement plan.You can use the form even if you maintain another qualified retirement plan.
You must notify your employees that you are using Form 5304-SIMPLE to establish the plan.You do not have to notify your employees that you are using Form 5305-SIMPLE to establish the plan.

Choosing the Right Form

When deciding which form to use, you should consider your own preferences as well as the needs and preferences of your employees. Here are some factors to consider:

  • If you want to keep things simple and don't want to impose any additional requirements on your employees, Form 5304-SIMPLE may be the better choice.
  • If you already have another qualified retirement plan in place and want to offer your employees another option, Form 5305-SIMPLE may be the better choice.
  • If you want to keep the establishment process low-key and don't want to notify your employees about the plan, Form 5305-SIMPLE may be the better choice.

Ultimately, the choice between Form 5304-SIMPLE and Form 5305-SIMPLE will depend on your specific circumstances and preferences.

Be sure to consult with a qualified tax professional to ensure that you are making the best choice for your business and your employees.

Setting Up SIMPLE IRAs

If you're considering setting up a SIMPLE IRA plan for your employees, you'll need to fill out either Form 5304-SIMPLE or Form 5305-SIMPLE.

Here's what you need to know about each form and the steps to set up a SIMPLE IRA.

Steps to Set Up a SIMPLE IRA

  1. Choose a financial institution: You can set up SIMPLE IRAs with banks, insurance companies, or other qualified financial institutions. If you use Form 5304-SIMPLE, your employees can choose the financial institution to receive their SIMPLE IRA plan contributions. If you use Form 5305-SIMPLE, you'll need to designate a financial institution for all contributions under the SIMPLE IRA plan.
  2. Execute a written agreement: You'll need to execute a written agreement to establish the SIMPLE IRA plan. You can use either Form 5304-SIMPLE or Form 5305-SIMPLE as a model plan document.
  3. Set up an IRA account for each employee: You'll need to set up an IRA account for each eligible employee who wants to participate in the SIMPLE IRA plan.
  4. Notify employees: You'll need to provide your employees with certain information about the SIMPLE IRA plan, including the name of the financial institution where contributions will be deposited, the contribution formula, and the withdrawal restrictions.
  5. Make contributions: You'll need to make either a matching contribution (up to 3% of an employee's compensation) or a 2% fixed contribution for each eligible employee.

Important Considerations

When setting up a SIMPLE IRA plan, it's important to keep the following considerations in mind:

  • Deadlines: You must establish the SIMPLE IRA plan by October 1 of the year in which you want to make contributions. If you're a new employer, you have until the first day your first employee is eligible to participate in the plan.
  • Contribution limits: The maximum amount an employee can contribute to a SIMPLE IRA plan is $13,500 in 2021. Employees who are age 50 or older can make an additional catch-up contribution of $3,000.
  • Withdrawal restrictions: Withdrawals from a SIMPLE IRA plan are subject to certain restrictions. If an employee withdraws funds before age 59 1/2, they may be subject to a 10% early withdrawal penalty.
  • Reporting requirements: You'll need to file Form 5500-SF each year to report information about the SIMPLE IRA plan to the IRS.

By following these steps and keeping these considerations in mind, you can successfully set up a SIMPLE IRA plan for your employees.

Conclusion

In conclusion, choosing between IRS Form 5304-SIMPLE and Form 5305-SIMPLE is an important decision when setting up a SIMPLE IRA plan. While both forms are similar, they do have some key differences that you should be aware of before making a decision.

Form 5304-SIMPLE allows for greater flexibility in terms of where plan participants can deposit their contributions. Each employee can choose a different financial institution if they so desire.

On the other hand, Form 5305-SIMPLE requires all contributions to be initially deposited at a financial institution designated by the employer.

Another difference between the two forms is that Form 5304-SIMPLE does not require the employer to provide a summary of the plan rules to employees. This can be beneficial for employers who want to keep plan administration simple.

However, Form 5305-SIMPLE may be a better option for employers who want to ensure that all contributions are deposited in one place.

It also requires the employer to provide a summary of the plan rules to employees, which can be helpful for employees who want to understand how the plan works.

Ultimately, the choice between Form 5304-SIMPLE and Form 5305-SIMPLE will depend on your specific needs and preferences. It is important to carefully consider the differences between the two forms and choose the one that is best for your business.

Frequently Asked Questions

How do I set up a SIMPLE IRA using Form 5304-SIMPLE or Form 5305-SIMPLE?

To set up a SIMPLE IRA plan, you need to fill out either Form 5304-SIMPLE or Form 5305-SIMPLE.

These forms are available on the IRS website. You will need to provide information about the employer, the plan administrator, and the employees who are eligible to participate in the plan.

What are the contribution limits for SIMPLE IRAs in 2022?

The contribution limit for SIMPLE IRAs in 2022 is $14,000. If you are age 50 or older, you can make an additional catch-up contribution of $3,000, bringing your total contribution limit to $17,000.

What are the rules for matching contributions in a SIMPLE IRA?

Employers are required to make either a matching contribution (up to 3% of the employee's compensation) or a 2% fixed (nonelective) contribution for each eligible employee.

The employer can choose to make a higher matching contribution, but it cannot exceed 3% of the employee's compensation.

Can I make pre-tax contributions to a SIMPLE IRA?

Yes, you can make pre-tax contributions to a SIMPLE IRA. Your contributions will be deducted from your paycheck before taxes are taken out, reducing your taxable income for the year.

What should I do if my employer is not depositing my SIMPLE IRA contributions?

If your employer is not depositing your SIMPLE IRA contributions, you should first talk to your employer to find out why.

If your employer is not willing or able to deposit your contributions, you can file a complaint with the Department of Labor's Employee Benefits Security Administration.

What is the difference between a SIMPLE IRA and a 401k?

A SIMPLE IRA is a retirement plan designed for small businesses with fewer than 100 employees. It has lower contribution limits and simpler administrative requirements than a 401k plan.

A 401k plan is a retirement plan designed for larger businesses with more than 100 employees. It has higher contribution limits and more complex administrative requirements than a SIMPLE IRA plan.