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Nov

2023

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Mastering IRA Rollover Rules: A Comprehensive Guide

By Pam O’Brien | Growing Wealth, Investing, Preparing for Retirement | No Comments

If you’re leaving your job, there are numerous things you must attend to before you clock out for the last time. One task that’s extremely important is figuring out what to do with the retirement account you have set up through the company you’re leaving.

Once you separate from your employer, you will have a few options to choose from when deciding what to do with your retirement savings, including doing an IRA rollover.

Read on to learn more about IRA rollovers and the IRA rollover rules.

Understanding the Basics of IRA Rollovers

If you’re considering a rollover of your retirement account to an IRA, here’s what’s involved.

What is an IRA Rollover?

An IRA rollover is the movement of funds from a qualified plan, like a 401(k) or 403(b), to an IRA. This scenario could come up when changing jobs or when switching accounts for reasons such as wanting lower fees and more investment options.
There are several factors to be aware of regarding what an IRA rollover is and how it works.

People generally roll their funds over so that their retirement money doesn’t lose its tax-deferred status. But, let’s say you leave your job and want to withdraw the money from your 401(k) so you can use it to pay some bills. In this case, you’d be taxed on the money and also receive a penalty for withdrawing funds before age 59 ½.

However, if you roll your money over instead of withdrawing it, you don’t have to pay taxes or penalties for an early withdrawal. Plus, you can keep saving for retirement.

When you roll funds over to a new IRA, you should follow IRA rollover rules that can help ensure you do everything legally, don’t have to pay taxes, and don’t pay penalties for any mistakes.

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The Difference Between Direct and Indirect Rollovers

You can choose between two types of rollovers and it’s important to know the differences between each.

First, you may choose a direct rollover, which is the moving of funds directly from a qualified retirement plan to your IRA, without ever touching the money. Your original company may move these funds electronically or by sending a check to your IRA provider. With a direct rollover you don’t have to pay taxes or early distribution penalties since your funds move directly from one tax-sheltered account to another.

The second option is an indirect rollover. In this case, you withdraw money from your original retirement account by requesting a check made out to your name, then deposit it into your new IRA later.

Some people choose an indirect rollover because they need the money to accomplish short-term plans, or they haven’t decided what they want to do with the money upon leaving their job. Other times, it’s because they simply don’t know their options.

Many people prefer a direct rollover to an indirect rollover, because the process is simpler and more efficient. With a direct rollover, you aren’t taxed on the money. With an indirect rollover, you are taxed, and if you’re under 59 ½ years old, you have to pay a 10% withdrawal penalty, unless you follow specific IRA rollover rules. You should consult with a tax professional to understand the implications of an indirect rollover prior to making this election.

Keep in mind that a transfer is different from a rollover: A transfer is the movement of money between the same types of accounts, while a rollover is the movement of money from two different kinds of accounts, like a qualified plan into a traditional IRA.

IRA Rollover Procedures: How and When to Do It

Ready to begin an IRA rollover? This is how to proceed.

Step-by-Step Guide to Completing a Rollover

First, decide which type of IRA you want to set up. If your new employer provides you with an IRA, it will be a SEP or SIMPLE IRA, but if you set one up yourself, you’ll choose between a Roth IRA and traditional IRA. There are pros and cons to each, but be sure to double-check that you can roll funds over from your original retirement account to whichever new type of account you select.

If you want to do a direct rollover, your employer can move your assets by making out a check to your IRA provider or by sending the money electronically. If you want to complete an indirect rollover, request to have the check made out to you.

Recommended: How to Roll Over Your 401(k)

Timing Your Rollover

There are some timing rules for rolling over an IRA, including the one-rollover-per- year rule and the 60-day rule. Read more about them below.

Navigating the IRA One-Rollover-Per-Year Rule

You can only do an IRA-to-IRA rollover once every 12 months, although there are some exceptions. You’ll want to familiarize yourself with this information to follow the IRA rollover rules.

Understanding the One-Per-Year Limit

If you’re rolling funds over from an IRA, you can only complete a rollover once every 12 months. There are exceptions, such as trustee-to-trustee transfers and rollovers from a traditional IRA to a Roth IRA, which are commonly referred to as conversions.

And, most notably, the one-year rule does not apply to IRA rollovers from an employer-sponsored retirement plan like a 401(k).

Eligibility and Limitations: What You Can and Cannot Roll Over

There are some rules about the types of assets you can roll over into an IRA.

Types of Distributions Eligible for Rollover

You can roll over almost any type of distribution from your IRA, with a few exceptions (see more information on that below). However, there is one key point to keep in mind.

The same-property rule says that when you withdraw assets from your retirement account, you must deposit those exact same assets into your IRA.

For example, if you take out $10,000, then $10,000 must go into your IRA, even if some of the original withdrawal was withheld for taxes. If you withdraw stocks, those same stocks must go into the new IRA, even if their value has changed.

This means that when you withdraw money, you can’t use the cash to invest, then put the money you earn from those investments into the IRA. That money would be considered regular income, so you’d be taxed on it.
If you break this rule, not only will you have to pay taxes, but you may also be required to pay a penalty.

Exemptions and Restrictions on Rollover Eligibility

You cannot roll over your annual required minimum distributions (RMDs), which you must take annually when you turn 73.

Also, you cannot roll over loans that were taken as distributions or hardship distributions from your retirement account.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Tax Withholding on Distributions: What to Expect

Taxes will not be withheld if you do a direct rollover of your retirement account to an IRA or another retirement account.

However, if an IRA distribution is made to you, it’s typically subject to 20% withholding.

Decisions on Distributions: What If You Don’t Make a Choice?

If you’re leaving a job, your plan administrator is required to notify you in writing of your rollover options.

The Default Outcome of Unmade Elections

If you don’t make a decision about what to do with the money in your retirement account and you no longer work for the employer that sponsored the plan, the plan administrator may take action. If the amount in your account is between $1,000 and $5,000, the administrator might deposit the money into an IRA for you. If there is $1,000 or less in your account, the plan administrator may pay the money to you. In that case, they might take out 20% in income tax withholding.

IRA Rollover Mistakes to Avoid

When making a rollover to an IRA, be sure to steer clear of these common errors.

The Crucial 60-Day Rule and Its Consequences

If you choose to do an indirect IRA rollover, you have 60 days to deposit the funds into a rollover IRA account, along with the amount your employer withheld in taxes. That’s because IRS rules require you to make up the taxes that were withheld with outside funds. Otherwise, you will be taxed on the withholding as income.

If you deposit the full amount — the amount you received plus the withheld taxes — you will report a tax credit of the withheld amount. The withholding will not be returned to you, but rather settled up when you file that year’s taxes.

In addition to the 60-day rule, be sure to abide by the one-year rule discussed above, as well as the same-property rule.

Special Considerations for Different Types of Retirement Plans

Unfortunately, you don’t always have the ability to transfer funds directly from one type of retirement account to another. You can roll over from certain types to others, but not every kind of account is compatible with every other account. For example: You can roll funds from a Roth 401(k) into a Roth IRA, but not into a traditional IRA; and you can roll funds from a traditional IRA into a SIMPLE IRA, but only after two years.

Rules Specific to 401(k), 403(b), and Other Employer-Sponsored Plans

If you have a Roth 401(k) or 403(b), you can roll the money in those accounts into a Roth IRA without paying taxes. However, if you have a traditional 401(k) or 403(b), you can still roll over the funds, but it will be considered a Roth conversion. In this case, you’ll need to pay income taxes on the money.

When in doubt, check the rules at irs.gov, and consult a tax advisor to confirm you’re making the right moves.

Your Rollover IRA: How to Optimize and Manage It

If you don’t already have an IRA provider, choose the one you want to use to open your new IRA. You can look for a provider that gives you the kind of investment options and resources you want while keeping the fees low to help you save as much as possible for retirement.

An online broker might be right for you if you plan to manage your investments yourself. Another option is a robo-advisor, which can provide help managing your money for lower fees than a human advisor would. But then again you might feel most comfortable with a person helping to manage your account. Ultimately, the choice of a provider is up to you and what’s best for your needs and situation.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Nov

2023

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Corporate Earnings Uncovered: A Step-by-Step Reading Guide

By Samuel Becker | Growing Wealth, Investing | No Comments

Companies issue earnings frequently, often on a quarterly basis. But knowing how to read an earnings report isn’t easy, and it requires a bit of legwork to get up to speed and understand the financials that businesses are reporting. Even so, it can be important, as those financials may help dictate your next investment moves.

Again, by learning how to read an earnings report, you could unlock invaluable information about the state of a company over time, as well as come to your own conclusions about whether the company’s stock is a worthwhile buy for you.

The Basics of Earnings Reports

When you invest in a stock, you are investing in a small sliver of ownership in a publicly traded company. To be publicly traded, companies are required to file quarterly (and annual) financial statements with the U.S. Securities and Exchange Commission (SEC).

For the uninitiated, looking at an earnings report may be akin to trying to read hieroglyphics. But you can break down the essentials and with some practice, it should all start to make sense.

Understanding the Essentials of Earnings Reports

Again, earnings reports are financial filings that keep shareholders and regulators apprised of the financial and legal standing of a company, typically filed quarterly. Financial transparency also allows current and potential investors to make decisions about the company through their own analysis and judgment.

Earnings reports contain information about company performance and critical metrics such as profits and revenue (or similar terms, like “net income”), and how those metrics compare to previous quarters or years. They also generally include some guidance or comments from company leadership.

The Timing of Earnings Releases

Generally, when you hear someone speaking of a general “earnings report,” they are referring to the forms 10-Q and 10-K, which are quarterly and annual financial filings, respectively. Both disclose a company’s revenue, expenses, profit, and other financial information each quarter.

The Anatomy of an Earnings Report

Some earnings reports are more in-depth than others, but they tend to all have at least some common elements. That includes an income statement (which, again, contains information related to profits, revenues, and losses), balance sheet, cash flow statement insights, and a statement of shareholder equity, which could be a breakdown of a company’s complete financial picture, along with assets and liabilities. In all, the report could be dozens of pages long.

Going deeper, here are some of the key elements.

Income Statement: How much money a company made over a period of time. Usually, the current quarter’s information is compared to previous quarters or multiple quarters.

Balance Sheet: What a company owns and what they owe—its assets and liabilities.

Cash Flow Statement: This section details the exchange of money between the company and the outside world over a given period of time.

Statement of Shareholder Equity: Changes of interest for the company’s shareholders over a given period of time. Here, you’ll find information on the value of all outstanding shares along with the potential dividend payment made by the company during the previous quarter(s).

For many investors, the income statement is of particular interest. This document details how much a company earns, how much it spends, and how profitable it is over a certain period of time. These numbers can reveal a lot about where a business is at and where they’re headed.

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Beyond the Numbers: Interpreting Earnings Reports

Understanding the basics of an earnings report is one thing. Using what’s gleaned from those reports is another.

Reading Between the Financial Lines

What does an earnings report actually tell you, as an investor? It’s not always so clear. In that sense, it’s important to try and put the numbers in the report into context so that it can help you plan your next market move – if you make one at all.

Looking deeper at the financials, though, here are some key terms and items to look for, which are typically found in the income statement.

Revenue: A company’s sales. This is also known as the “top line,” because it sits at the top of the cash flow statement. This figure does not take into account the costs of running a business, so may not be the best indicator as to the overall financial health of a company.

Cost of Revenue/Cost of Sales: Directly under the revenue or sales figure you’ll find a section that details the costs of producing the goods sold, such as production and manufacturing. To be clear, these are not all of the costs associated with running a business, only the costs directly associated with the sale of the product or service.

Below this figure, you will find the section referred to as “gross profit” or “gross margin,” which is the cost of revenue subtracted from the revenue. It is called “gross” because the figure is not net of all costs associated with running a business—only the costs associated with sales.

Operating Expenses: These are the costs of running a business that cannot necessarily be attributed to a company’s operations for a given period. Research and development, marketing expenses, and salaries of administrative personnel are all examples.

Here, it is possible to account for depreciation expenses, such as the wear and tear on assets such as machinery and tools or other assets that are used over long periods of time.

At this point in the cash flow statement, a company may account for adjustments to income due to interest earnings or expenses (such as earning interest in a savings account or paying interest on debts) or income taxes. Sometimes, this information is listed separately.

Earnings: This is a company’s profits, also known as the net income or “bottom line,” because earnings exist at the bottom of the cash flow statement after all costs are subtracted. This is the money that the company made in the previous quarter after all costs of running the business are accounted for. Ultimately, this is going to be the number that most concerns shareholders, as a profitable business model is what attracts many investors.

Not all businesses are profitable all of the time, so it is possible that an earnings number can reflect a loss. When a company is recording a loss, the number is written inside of parentheses.

Earnings Per Share (EPS): While the earnings figure is certainly important, it’s helpful to have some context as to what that means to investors. The EPS calculation divides the earnings figure by the number of outstanding shares to derive a figure that represents what it would look like if those earnings were to be evenly spread across all shareholders.

For example, an EPS number of $1 would indicate a $1 earning per share of outstanding stock. However, a $1 EPS does not necessarily mean that’s what the company pays out to each shareholder.

Instead, it’s a way for investors to compare profitability across businesses within the same industry, to a business’s past profitability, or to expectations for a company’s future profitability. More than anything, it is used as a tool for analysis.

For a more qualitative look at a business, you could take a look at the section titled Management’s Discussion and Analysis. Here, executives summarize both the numbers detailed in the financial statements and what’s going on in the business that might not be outwardly obvious simply by looking at the numbers.

For example, executives could take this time to discuss a merger or other market factors that may have led to skewed numbers for that quarter.

Assessing Financial Risk Factors in Reports

All businesses are facing some sort of risk, be it from growing competition in a specific sector, or increasing interest rates. Often, company leadership might discuss those risks in the commentary in an earnings release, or in an accompanying earnings call. Other times, investors can suss out potential risk in the numbers themselves (are revenues in a specific area falling, and why?). The important thing to know is that if businesses are facing some sort of risk, investors may be able to find clues as to how big of a threat those risks are in the filings.

The Earnings Season Explained

Investors are likely to become familiar with the term “earnings season,” and for good reason.

What is Earnings Season and Why it Matters

Earnings season refers to the four times during the year when companies release quarterly earnings reports, and many of them tend to do so around the same time. As such, it’s a sort of “season,” as investors get to dig through several earnings reports and try to suss out trends and make decisions regarding their portfolios.

The Impact of Earnings Reports on Stock Prices

Earnings season can be a volatile time for stock prices, as a company’s performance, put on paper and released to the world, allows everyone to see how it’s doing – and decide whether to buy, sell, or hold their stock. As such, an unexpected earnings report – good or bad – can create volatility in the market. That’s why investors will want to pay attention around earnings season.

Earnings Calls: What to Expect

Investors are able to take part in earnings calls, which often requires tuning in either online or by phone. While every earnings call is different, they tend to have the same elements: Company management (usually the CEO or another C-suite executive) discusses the top-line financial results for the period, and then discusses what’s ahead.

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Getting the Most Out of Earnings Reports

As an investor, you’ll want to do what you can with the latest earnings reports. That includes pulling out the most pertinent information, knowing what to anticipate, and then synthesizing it all into actionable insights.

Analyzing the Report: TL;DR for Financial Reports

For most investors, the top-line financials, and perhaps any comments from company leadership, are the most important things to check out in an earnings report. For instance: did the company generate a profit? Was it more or less than expected? Are executives bullish or bearish about the coming quarter? If you’re strapped for time, those are the things you’ll want to know as an investor.

Upcoming Earnings Report Calls: What to Anticipate

Companies generally announce earnings calls well in advance – sometimes even months in advance. That gives investors plenty of time to plan to attend, and to make any pre-earnings market moves. It may be a good idea to read financial media or analyst reports, too, to get a sense of what to expect. Expectations are a huge element in the market, and even if a company reports strong numbers, they may be below expectations, causing share values to fall.

Leveraging Earnings Reports

At the end of the day (or earnings season), earnings reports are tools that investors can use to plan their next moves and hone in their investment strategy. But there are also sub-strategies that they can use during earnings season, too.

Strategies for Investors During Earnings Season

While some investors may find it profitable to day-trade or even swap options during earnings season, many investors may want to try and get a sense of where expectations lie, and position themselves accordingly. For instance, if expectations are that a company’s report will show it lost money, then an investor may want to sell their holdings, anticipating a fall in share prices the day earnings come out.

The opposite can also be true, however. Perhaps the safest play, though, is to stick to a buy-and-hold strategy, and not let any market volatility – earnings-induced, or otherwise – change that strategy.

Things to Consider for Quarterly Reports

As noted, considering top-line financial metrics and company leadership’s posturing is important for investors. But you may also want to think about the context of the earnings report – which quarter, or time of the year is it covering, for instance. If a retail company reports strong Q4 earnings, for instance, that may have been influenced by the holiday shopping season.

Or, if a food company is struggling with higher costs during the summer because of a drought causing shortages, that’s something else. There are lots and lots of factors that can affect a company’s performance.

Using Earnings Reports to Forecast Market Trends

It may be tempting to try and use earnings reports to forecast market trends, but tread carefully – nobody knows what the market is going to do next. There may be some things to be gleaned about what the future holds, but be careful and perhaps consider consulting with a financial professional before making any moves based on hunches.

Again, earnings reports are critical tools and troves of information for investors, but they are backward-looking, and the world is a wild place – you never know what’s going to happen next.

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The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Nov

2023

The Ultimate Guide to SIMPLE IRAs for Employees and Small Businesses

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

If you’re exploring retirement plans, you may be wondering, what is a SIMPLE IRA? A SIMPLE IRA is one type of tax-advantaged retirement savings plans to help self-employed individuals and small business owners put money away for their future.

You may already be familiar with traditional individual retirement accounts (IRAs). A SIMPLE IRA, or Saving Incentive Match Plan for Employees, is one type of IRA.

What Is a SIMPLE IRA?

SIMPLE IRA plans are employer-sponsored retirement accounts for businesses with 100 or fewer employees. They are also retirement accounts for the self-employed. If you’re your own boss and self-employed, you can set one up for yourself.

For small business owners, SIMPLE IRAs are an easy-to-manage, low-cost way to contribute to their own retirement while at the same time helping employees to contribute to their savings as well.

How Does a SIMPLE IRA Work?

Now that you know the answer to the question, what is a SIMPLE IRA?, you are probably wondering how this plan works. A SIMPLE IRA is one of the different types of retirement plans available. In order for an employee to participate, they must have earned at least $5,000 in compensation over the course of any two years prior to the current calendar year, or they must expect to make $5,000 in the current calendar year.

It is possible for employers to set less restrictive rules for SIMPLE IRA eligibility. For example, they could lower the amount employees are required to have made in a previous two-year time. However, they cannot make participation rules more restrictive.

Employers can exclude certain types of employees from the plan, including union members who have already bargained for retirement benefits and nonresident aliens who don’t receive their compensation from the employer.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Simple IRA vs. Traditional IRA

When it comes to a SIMPLE IRA vs. Traditional IRA, the two plans are similar. However, there are some key differences between the two. A SIMPLE IRA is for small business owners and their employees. A traditional IRA is for anyone.

The eligibility criteria is different for the two plans. To be eligible for a SIMPLE IRA, an employee must have earned at least $5,000 in compensation over the course of two years prior — or expect to make $5,000 in the current calendar year. With a traditional IRA, an individual must be under age 70 and have earned income in the past year.

And while both types of IRAs are tax deferred, a traditional IRA allows individuals to make tax deductible contributions, while only an employer or sole proprietor can make tax deductible contributions to a SIMPLE IRA.

One of the biggest differences between the two plans is the contribution amount. Individuals can contribute $6,500 in 2023 to a traditional IRA (or $7,500 if they are age 50 or older), while those who have a SIMPLE IRA can contribute $15,500 (plus an extra $3,500 for those age 50 and older) in 2023.

Simple IRA vs. 401(k)

SIMPLE IRAs have some similarity to 401(k)s. Both are employer-sponsored plans that eligible employees can contribute to, contributions made to both are made with pre-tax dollars, and the money in the accounts grows tax-deferred. Both types of plans give the employer the option to make matching contributions to employees’ plans.

One major difference between the two plans is that while self-employed individuals can’t open a 401(k), they can set up a SIMPLE IRA for themselves.

Additionally, individuals can contribute much more to a 401(k) than they can to a SIMPLE IRA. In 2023, those with a 401(k) can contribute $22,500 to the plan, plus an extra $7,500 for those 50 and older. In comparison, individuals can contribute $15,500 to a SIMPLE IRA, plus $3,500 extra for those 50 and up.

SIMPLE IRA Contribution Rules

Employer Contribution and Matching Rules

When an employer sets up a SIMPLE IRA plan, they are required to contribute to it each year. They have two options: They can either make matching contributions of up to 3% of an employee’s compensation, or they can make a nonelective contribution of 2% for each eligible employee, up to an annual limit of $330,000 in 2023.

If the employer chooses the latter option, they must make a contribution to their employees’ accounts, even if those employees don’t contribute themselves. Contributions to employee accounts are tax deductible.

Employee Contributions

Eligible employees can choose to contribute to the plan, as well. In 2023, SIMPLE IRA contribution limits are up to $15,500 in deferrals. Those over the age of 50 can contribute an extra $3,500 in catch-up contributions, which brings their annual maximum contributions up to $19,000. Those contribution levels may change over time, as the government adjusts them to account for inflation.

Contributions reduce employees’ taxable income, which gives them an immediate tax benefit, lowering their income taxes in the year they contribute. Contributions can be invested inside the account and grow tax-deferred until the employee makes withdrawals when they retire.

IRA withdrawal rules are particularly important to pay attention to as they can be a bit complicated. Withdrawals made after age 59 ½ are subject to income tax. If you make withdrawals before then, you may be subject to an additional 10% or 25% penalty. Account holders must make required minimum distributions from their accounts when they reach age 73.

Establishing and Operating a SIMPLE IRA Plan

SIMPLE IRAs are relatively easy to put in place, since they have no filing requirements for employers. Employers cannot offer another retirement plan in addition to offering a SIMPLE IRA.

If you’re interested in opening a SIMPLE IRA, banks and brokerages may have a plan, known as a prototype plan, that’s already been approved by the IRS.

Otherwise you’ll need to fill out one of two forms to set up your plan:

• Form 5304-SIMPLE allows employees to choose the financial institutions that will receive their SIMPLE IRA contributions.

• You can also fill out Form 5305-SIMPLE, which means employees will deposit SIMPLE IRA contributions at a single financial institution chosen by the employer.

Once you have established the SIMPLE IRA, an account must be set up by or for each employee, and employers and employees can start to make contributions.

Notice Requirements for Employees

There are minimal paperwork requirements for a SIMPLE IRA. Once the employer opens and establishes the plan through a financial institution, they need to notify employees about it. This should be done by October 1 of the year the plan is intended to begin. Employees have 60 days to make their elections.

Eligible employees need to be notified about the plan annually. Any changes or new terms to the plan must be disclosed. At the beginning of each annual election period, employers must notify their employees of the following:

• Opportunities to make or change salary reductions.

• The ability to choose a financial institution to receive SIMPLE IRA contribution, if applicable.

• Employer’s decisions to make nonelective or matching contributions.

• A summary description provided by the financial institution that acts as trustee of SIMPLE IRA fund, and notice that employees can transfer their balance without cost of penalty if the employer is using a designated financial institution.

Participant Loans and Withdrawals

No loans are allowed to participants in a SIMPLE IRA. Withdrawals made before age 59 ½ are subject to a possible 10% or 25% penalty.

Rollovers and Transfers to Other Retirement Accounts

For the first two years of participating in a SIMPLE IRA, participants can only do a tax-free rollover to another SIMPLE IRA. After two years, they may be able to roll over their SIMPLE IRA to other non-Roth IRAs or an employer-sponsored plan such as 401(k).

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

The Advantages and Drawbacks of a SIMPLE IRA Plan

While SIMPLE IRAs offer a lot of benefits, including immediate tax benefits, tax-deferred growth, and employer contributions, there are some drawbacks. For example, SIMPLE IRAs don’t allow employees to save as much as other retirement plans such as 401(k)s and Simplified Employee Pension (SEP) IRAs.

In 2023, employees can contribute up to $22,500 to a 401(k) account, with an extra $7,500 in catch-up contributions for those 50 and older. Individuals with a SEP IRA account can contribute up to 25% of their employee compensation, or $66,000, whichever is less, in 2023.

The good news is, employees with SIMPLE IRAs can make up some of that lost ground. Employers may be wondering about the merits of choosing between a SIMPLE and traditional IRA, but they can actually have both.

Employers and employees can open a traditional or Roth IRA and fund it simultaneously. For 2023, total contributions to IRAs can be up to $6,500, or $7,500 for those ages 50 and older.

Here some pros and cons of starting and funding a SIMPLE IRA at a glance:

Pros of a SIMPLE IRA	Cons of a SIMPLE IRA
Easy to set up, with less paperwork than other retirement accounts, such as 401(k)s.	Lower contribution limits than other plans, such as 401(k)s and SEP IRAs.
Employers have lower upfront and management costs to run the plan.	Withdrawals made before age 59 ½ are subject to a possible 10% or 25% penalty.
Contributions are tax deductible for employers and employees.	There is no Roth option that would allow employees to fund the retirement account with after-tax dollars that would translate to tax-free withdrawals in retirement.
There are no filing requirements with the IRS.

Eligibility and Participation in a SIMPLE IRA

As mentioned previously, there are some rules about who can participate in a SIMPLE IRA. Here’s a quick recap.

Who Can Establish and Participate in a SIMPLE IRA?

Small business owners with fewer than 100 employees and self-employed individuals can set up and participate in a SIMPLE IRA, along with any eligible employees.

Employers can’t offer any other type of employer-sponsored plan if they set up a SIMPLE IRA.

Employees’ Eligibility and Participation Criteria

In order for an employee to be eligible to participate, they must have earned at least $5,000 in compensation over the course of any two years prior to the current calendar year, or they must expect to make $5,000 in the current calendar year.

Employees can choose less restrictive requirements if they choose. They may also exclude certain individuals from a SIMPLE IRA, such as those in unions who receive benefits through the union.

Investment Choices and Account Maintenance

The employer chooses investment options for the SIMPLE IRA and maintains the plan. Employees then select the investment options they want.

Investment Choices Under a SIMPLE IRA

Typically, there are more investment choices with a SIMPLE IRA than there with a 401(k). Investment options can include stocks, mutual funds, exchange-traded funds (ETFs), and bonds.

Understanding SIMPLE IRA Distributions

There are particular rules for SIMPLE IRA distributions, and it’s important to be aware of them. This is what you need to know.

Withdrawal Rules and Tax Consequences

As discussed previously, withdrawals made before age 59 ½ are subject to income tax plus a potential 10% or 25% penalty. Withdrawals made after age 59 ½ are subject to income tax only and no penalty. Account holders must make required minimum distributions from their accounts when they reach age 73.

The 2-Year Rule and Early Withdrawal Penalties

There is a two-year rule for withdrawals from a SIMPLE IRA. If you make a withdrawal within the first two years of participating in the plan, the penalty may be increased from 10% to 25%.

The Takeaway

SIMPLE IRAs are one of the easiest ways that self-employed individuals and small business owners can help themselves and their employees save for retirement, whether they’re experienced retirement investors or they’re opening their first IRA.

These accounts can even be used in conjunction with certain other retirement accounts and investment accounts to help individuals save even more.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/shapecharge

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Nov

2023

Understanding the 403(b) Retirement Plan: A Comprehensive Guide

By Pam O’Brien | invest, Investing, Preparing for Retirement | Comments Off

If you work for a tax-exempt organization or a public school, you typically have access to a 403(b) plan rather than a 401(k). What is a 403(b)? It’s a workplace retirement plan that can help you start saving for your post-work future.

In this guide, find out how 403(b) plans work, who is eligible for them, and the rules for contributing.

Demystifying the 403(b) Plan

A retirement plan for employees of tax-exempt organizations and public schools, a 403(b) is also known as a tax-sheltered annuity or TSA plan. Employees can contribute to the plan directly from their paycheck, and their employer may contribute as well. A 403(b) can help you save for retirement.

What Exactly is A 403(b) Retirement Plan?

What is a 403(b)? The 403(b) retirement plan is a type of qualified retirement plan designed to help employees save for retirement. Certain schools, religious organizations, hospitals and other organizations often offer this plan to employees. (In layman’s terms, it’s the 401(k) of the nonprofit world.)

Like 401(k)s, 403(b) plans allow for regular contributions toward an employee’s retirement goal. Contributions are tax-deductible in the year they’re made. Also, you won’t pay taxes on any earnings in the account until you make withdrawals.

However, unlike 401(k)s, 403(b)s sometimes invest contributions in an annuity contract provided through an insurance company rather than allocate it into a stocks-and-bonds portfolio.

Distinguishing Between Different 403(b) Options

There are two main types of 403(b) plans: traditional and Roth. With a traditional 403(b), employees contribute pre-tax money to their 403(b) account. This reduces their taxable income, giving them an immediate tax advantage. They will pay taxes on the money when they withdraw it.

With a Roth 403(b), employees contribute after-tax dollars to the plan. They will not owe taxes on the money when they withdraw it.

Not every 403(b) plan offers a Roth version.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The 403(b) Plan in Action: Participation and Contributions

The IRS states that a 403(b) plan “must be maintained under a written program which contains all the terms and conditions…” In other words, for the plan to be legitimate, paperwork is required.

An employee may get a whole packet of information about the 403(b) plan as part of the onboarding process. This package can include salary reduction agreement terms (this refers to employee contributions from the plan that come from the employee’s paychecks), eligibility rules, explanations of benefits, and more.

In certain limited cases, an employer may not be subject to this requirement. For example, church plans that don’t contain retirement income aren’t required to have a written 403(b) plan.

Who Gets to Participate?

Only employees of specific public and nonprofit employers are eligible to participate in 403(b)s, as are some ministers. You may have access to a 403(b) plan if you’re any of the following:

• An employee of a tax-exempt 501(c)(3) nonprofit organization

• An employee of the public school system, including state colleges and universities, who is involved in the day-to-day operations of the school

• An employee of a public school system organized by Indian tribal governments

• An employee of a cooperative hospital service organization

• A minister who works for a 501(c)(3) nonprofit organization and is self-employed, or who works for a non-501(c)(3) organization but still functions as a minister in their day-to-day professional life

Employers may automatically enroll employees in a 403(b), though employees can opt out if they so choose. Of course, participating in an employer-sponsored retirement plan is one good way to start saving for retirement.

Universal Availability Rule: Who Doesn’t Qualify for 403(b) Participation?

Employers must offer 403(b) coverage to all qualifying employees if they offer it to one — this rule is known as “universal availability.” However, plans may exclude certain employees, including those under the following circumstances:

• Employees working fewer than 20 hours per week

• Employees who contribute $200 or less to their 403(b) each year

• Employees who participate in a retirement plan, like a 401(k) or 457(b), of the employer

• Employees who are non-resident aliens

• Employees who are students performing certain types of services

The same laws that allow these coverage limits also require employers to give employees notice of specific significant plan changes, like whether or not they have the right to make elective deferrals.

Types of Contributions: Understanding Your Options

You can contribute to your 403(b) through automatic paycheck deductions. This process is similar to that of a 401(k) — the employee agrees to have a certain amount of their salary redirected to the retirement plan during each pay period.

However, other types of 403(b)contributions are also eligible, including:

• Nonelective contributions from your employer, such as matching or discretionary contributions

• After-tax contributions can be made by an employee and reported as income in the year the funds are earned for tax purposes. These funds may or may not be designated Roth contributions. In this case, the employer needs to keep separate accounting records for Roth contributions, gains, and losses.

The Cap on Contributions: Limits and Regulations

In 2023, workers can put up to $22,500 into a 403(b) plan. Workers who’ve been with their employer for 15 years may be able to contribute an additional $3,000 if they meet certain requirements. Those age 50 or older can contribute an additional $7,500 to a 403(b).

Combined contributions from the employee and the employer may not exceed the lesser of 100% of the employee’s most recent yearly compensation or $66,000 in 2023.

Investing Within Your 403(b) Plan

A 403(b) may offer an employee a more limited number of investment options compared to other retirement savings plans.

Exploring Investment Choices for Your 403(b)

One way 403(b) plans diverge from other retirement plans, like 401(k)s and even IRAs, is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds (ETFs), 403(b)s commonly invest in annuity contracts sold by insurance companies.

Part of the reason these plans are known as “tax-sheltered annuities” is that they were once restricted to annuity investments alone — a limit removed in 1974. While many 403(b) plans still offer annuities, they have also largely embraced the portfolio model that 401(k) plans typically offer. 403(b) plans now typically also offer custodial accounts invested in mutual funds.

Comparing 403(b) with Other Retirement Plans

How does a 403(b) stack up against other retirement plans, such as 401(k)s, IRAs, and pension plans? Here’s how they compare.

403(b) vs. 401(k): Similarities and Differences

These two plans share many similarities. However, one notable difference between 403(b) plans and 401(k) plans is there is no profit sharing in 403(b)s — workplaces that are 403(b)-eligible aren’t working toward a profit.

Another way 403(b) plans diverge from 401(k)s is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds, 403(b)s commonly invest in annuity contracts sold by insurance companies or in custodial accounts invested in mutual funds.

403(b) vs. IRA vs. Pension Plans: What’s Right for You?

An IRA offers more investment choices than a 403(b). With a 403(b), your investment options are narrower.

403(b) plans may also have higher fees than other retirement plans. In addition, certain 403(b) plans aren’t required to adhere to standards set by the Employee Retirement Income Security Act (ERISA), which protects employees who contribute to a retirement account.

However, 403(b)s have much higher contribution limits than IRAs. IRA contributions are $6,500 for 2023 for individuals under age 50, compared to $22,500 in contributions for a 403(b).

As for pension plans, public school teachers are typically eligible for defined benefit pension plans that their employer contributes to that gives them a lump sum or a set monthly payment at retirement. These teachers should also be able to contribute to a 403(b), if it’s offered, to help them save even more for retirement.

💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

Advantages and Challenges of a 403(b) Plan

There are both pros and cons to participating in a 403(b) plan. Here are some potential benefits and disadvantages to consider.

Tax Benefits and Employer Matching: The Upsides

As mentioned, a 403(b) offers tax advantages, whether you have a traditional or Roth 403(b) plan. Contribution limits are also higher than they are for an IRA.

Employers may match employees’ contributions to a 403(b). Check with your HR department to find out if your employer matches, and if so, how much.

Potential Drawbacks: Fees and Investment Choices

Some 403(b)s charge higher fees than other types of plans. They also have a narrower range of investment options, as mentioned earlier.

Making Changes to Your 403(b) Plan

If a situation arises that requires you to make changes to your 403(b), such as contributing less from your paychecks to the plan, it is possible to do so.

When Life Changes: Adjusting Your 403(b) Contributions

You can adjust your contributions to a 403(b). Check with your employer to find out if they have any rules or guidelines for when and how often you can make changes to your contributions, and then get the paperwork you’ll need to fill out to do so.

Plan Termination: Understanding the Process and Implications

An employer has the right to terminate a 403(b), but they’re required to distribute all accumulated benefits to employees and beneficiaries “as soon as administratively feasible.”

Employees may be eligible to roll their 403(b) funds over into a new retirement fund upon termination.

Loans, Distributions, and Withdrawals from 403(b) Plans

Here’s information about taking money out of your 403(b), whether it’s a loan or a withdrawal.

Borrowing from Your 403(b): What You Need to Know

There are rules that limit how and when an account holder can access funds in a 403(b) account. Generally, employees can’t take distributions, without penalties, from their 403(b) plan until they reach age 59 ½.

However, some 403(b) plans do allow loans and hardship distributions. Loan rules vary by the plan. Hardship distributions require the employee to demonstrate immediate and heavy financial need to avoid the typical early withdrawal penalty. Check with your employer to find out the particulars of your plan.

Taking Distributions: The When and How

Like other retirement plans, 403(b)s have limits on how and when participants can take distributions. Generally, account holders cannot touch the funds until they reach age 59 1/2 without paying taxes and a penalty of 10%. Furthermore, required minimum distributions, or RMDs, apply to 403(b) plans and kick in at age 73.

If you leave your job, you can keep your 403(b) where it is, or roll it over to another retirement account, such as an IRA or a retirement plan with your new employer.

Maximizing Your 403(b) Plan

If you have a 403(b), the amount you contribute to the plan could potentially help you grow your savings. Here’s how.

Strategic Contribution Planning: How to Maximize Growth

If your employer offers a match on contributions to your 403(b), you should aim to contribute at least enough to get the full match. Not doing so is like leaving free money on the table.

Beyond that, many financial advisors suggest aiming to contribute at least 10% of your income for retirement. You may be able to save less if you have access to guaranteed retirement income such as a pension, as many teachers do, but consider all your options carefully before deciding.

If 10% seems like an unreachable goal, contribute what you can, and then consider increasing the amount that you save each time you get a raise. That way, the higher contribution will not put as much of a dent in your take-home pay.

Doing some calculations to figure out how much you need to save and when you can retire can help you determine the best amount of save.

The Takeaway

If you work for a nonprofit employer, contributing to a 403(b) is a tax-efficient way to start saving for retirement. The earlier you can start saving for retirement, the more time your money can have to grow.

If your employer does not offer a 403(b), or if you’re interested in additional ways to save or invest for retirement, you may want to consider opening another tax-advantaged retirement savings account such as an IRA to help you reach your financial goals.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

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Nov

2023

SIMPLE IRA Contribution Limits for Employers & Employees

By Austin Kilham | invest, Investing, Preparing for Retirement | Comments Off

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan.

It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, along with solo 401(k)s, and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored (if you’re self-employed, you would be the employer in this case), and like other IRAs they give employees some flexibility in choosing their investments.

SIMPLE IRA contribution limits are one of the main differences between accounts: meaning, how much individuals can contribute themselves, and whether there’s an employer contribution component as well.

Here’s a look at the rules for SIMPLE IRAs.

SIMPLE IRA Basics

SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or less.

Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so, as a way to save for retirement.

Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year.

An employee’s income doesn’t affect SIMPLE IRA contribution limits.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

SIMPLE IRA Contribution Limits, 2022 and 2023

Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.

Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty free at age 59 ½. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.

Employee contributions are capped. For 2022, contributions cannot exceed $14,000 for most people. For 2023, it’s $15,500. Employees who are age 50 and over can make additional catch-up contributions of $3,000 for 2022 and $3,500 for 2023, bringing their total contribution limit to $17,000 in 2022 and $19,000 in 2023.

See the chart below for SIMPLE IRA contribution limits for 2022 and 2023.

	2022	2023
Annual contribution limit	$14,000	$15,500
Catch-up contribution for age 50 and older	$3,000	$3,500

Employer vs Employee Contribution Limits

Employers are required to contribute to each one of their employees’ SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.

There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.

If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years.

In option A, if an employee doesn’t make a contribution to their SIMPLE account, the employer does not have to contribute either.

Now let’s consider the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well.

Contributions are limited. Employers may make a 2% contribution up to $330,000 in employee compensation for 2023, and up to $305,000 in employee compensation for 2022.

(The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)

Whatever contributions employers make to their employees’ plans are tax deductible. And if you’re a sole proprietor you can deduct the employer contributions you make for yourself.

See the chart below for employer contribution limits for 2022 and 2023.

	2022	2023
Matching contribution	Up to 3% of employee contribution	Up to 3% of employee contribution
Nonelective contribution	2% of employee compensation up to $305,000	2% of employee compensation up to $330,000

SIMPLE IRA vs 401(k) Contribution Limits

There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.

Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59 ½.

Contribution limits for 401(k)s are much higher than for SIMPLE IRAs. In 2023, individuals can contribute up to $22,500 to their 401(k) plans. Plan participants age 50 and older may make $7,500 in catch-up contributions for a total of $30,000 per year.

Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.

Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions can equal up to $66,000 in 2023, or 100% of an employee’s compensation, whichever is less. For those age 50 and older, that figure jumps to $73,500.

As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA. See chart below for a side-by-side comparison of 401(k) and SIMPLE IRA contribution limits.

	SIMPLE IRA 2022	SIMPLE IRA 2023	401(k) 2022	401(k) 2023
Annual contribution limit	$14,000	$15,500	$20,500	$22,500
Catch-up contribution	$3,000	$3,500	$6,500	$7,500
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $305,000	Up to 3% of employee contribution, or 2% of employee compensation up to $330,000	Matching and nonelective contributions up to $61,000	Matching and nonelective contributions up to $66,000.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

SIMPLE IRA vs Traditional IRA Contribution Limits

Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional or Roth.

Traditional IRAs

When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2023, individuals can contribute $6,500, or $7,500 for those 50 and older.

That said, when paired with a SIMPLE IRA, individuals could be making $22,000 in total contributions, almost as much as with a 401(k).

Roth IRAs

Roth IRAs work a little bit differently.

Contributions to Roths are made with after-tax dollars. Money inside the account grows-tax free and individuals pay no income tax when they make withdrawals after age 59 ½. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.

Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts.

(Want to learn more about IRAs? Check out these frequently asked questions.)

See the chart for a look at SIMPLE IRA vs. traditional and Roth IRA contribution limits.

	SIMPLE IRA 2022	SIMPLE IRA 2023	Traditional and Roth IRA 2023
Annual contribution limit	$14,000	$15,500	$6,500
Catch-up contribution	$3,000	$3,500	$1,000
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $305,000 for 2022	Up to 3% of employee contribution, or 2% of employee compensation up to $330,000 for 2023	None

The Takeaway

SIMPLE IRAs are an easy way for employers and employees to save for retirement — especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.

While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.

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