What You Should Know About IRS Publication 560

Cars, TVs, phones, and computers all come with instruction manuals — as well they should. These are all complex items that would frustrate people to no end if they didn’t come with something to help people understand how to use the items they have put their hard-earned money into. Retirement plans are no different. 

IRAs, 401(k)s, and profit-sharing plans can be difficult to understand and can be riddled with industry-specific legal jargon. IRS Publication 560 aims to make these concepts, regulations, and laws more easily digestible for the retirement investor. 

What is Publication 560?

The IRS’s Publication 560: Retirement Plans for Small Business is an annually released and updated publication, detailing the ins and outs of setting up and running retirement plans for the employers and employees of a small business. 

Publication 560 should be thought of as a guide. It provides employers with important information on topics such as income requirements, contribution limits, and tax strategies, among many others. 

Familiarizing yourself with the contents of Publication 560 can give you a significant advantage should you decide to cash out, transfer, rollover, or open a new account. 

What are the Plans Covered Under IRS Publication 560?

• SEP IRA (Simplified Employee Pension)
• SIMPLE IRA (Savings Incentive Match Plan for Employees)
• Qualified Plans

SEP IRAs

SEP IRAs are retirement plans in which the only one making contributions to the IRA is the employer. 

An employer may make contributions of up to 25% of an employee’s yearly income. However, the contributions must be uniform for all employees. An employer can not contribute 20% to one employee’s IRA but 24% to another. 

Having a SEP IRA does not prohibit an employee from setting up an additional IRA that he or she can contribute to. 

SIMPLE IRAs

SIMPLE IRAs are very user-friendly plans that the employer is required to contribute to, but not the employee. SIMPLE IRAs may only be used if the company isn’t utilizing any other retirement plans. The employee must have made at least $5,000 in the last two calendar years and expect to earn at least that much during the calendar year of participation. 

Qualified Plans

Any retirement plan established by an employer to provide retirement income to qualified employees and their beneficiaries. These plans include 401(k)s, profit-sharing plans, IRAs, and pension plans. 

What Does Publication 560 Cover?

• Employee Contribution Limits
• Employer Contribution Limits
• Income Limits
• What Types of Retirement Plans can be Set Up
• How to Set Up Retirement Plans
• How to Treat Distributions

Employee Contribution Limits

Employee contribution limits can change dramatically from plan to plan. 

With a SEP IRA, employees don’t contribute at all. An employer’s contributions for 2021 cannot exceed the lesser of either 25% of the employee’s income, or $58,000.

SIMPLE IRAs have a contribution limit of $13,500, with a “catch-up” contribution of $3,000 for employees 50 years old or older. Employees are not obligated to contribute. In 2021, employers are obligated to match a mandatory 3% of employee contributions or 2% non-elective contribution.

“Qualified Plans” is an umbrella term for any plan established by a company to generate income for retirement. The employee contribution limits will differ greatly and should be researched within Publication 560 to determine the employee contribution limits for your specific plan. 

Qualified plans can often be much more complex than SEP and SIMPLE IRAs. Under the umbrella of “qualified plans,'' you will find Qualified Defined-Contribution plans and Qualified Defined-Benefits Plans. The first refers to a fixed amount the employee will contribute each period. The second refers to a specific payout to beneficiaries at the end of the policy.

Income Limits

Different plans come with different stipulations regarding income limits. Form 560 defines what those limits are. For example, in the case of a Roth IRA, employees making more than $208,000 a year (married filing jointly) are prohibited from contributing to the plan. The same is true of employees making $10,000 or more that are married filing taxes separately. 

Determining the rules regarding income limits is a great start in finding the best retirement plan.

Distributions. A distribution occurs when an asset from an account or fund is sent to the account holder. Distributions are often what the IRS calls “taxable events.” Publication 560 lays out exactly how distributions work for different retirement plans. This is a great thing to learn about in terms of choosing your plan. It’s also great knowledge to have if you already have a plan and are looking into rollovers or transfers. 

How Can IRAR Help?

IRAR Trust Company has been helping clients reach their retirement plan goals since 1996. We are a dedicated team of experts that offer investment education and explanation of the complex rules and regulations governing retirement accounts. Our contributions page, for example, can help you better understand how to play for the future, and if you’re ready to take the next steps, IRAR is here to help.