Simple IRA

Savings Incentive Match Plans for Employees (SIMPLE IRAs) are retirement plans designed specifically for small business owners and their employees and are intended to help those employees save and invest for retirement. SIMPLE IRA plans consist of traditional IRAs and can be set up quickly and conveniently by employers who qualify. In order to set up a SIMPLE IRA plan for its employees, the small business must meet certain qualifying conditions; the company must not offer any other type of retirement plan to its employees and, in most cases, the company cannot employ over 100 people in order to qualify. Companies that meet these criteria can simply fill out a few simple forms and start their SIMPLE IRA plan almost immediately.

SIMPLE IRA rules for companies

In order to offer SIMPLE IRA plans for their employees, small businesses must make a contribution equivalent to 2% of each eligible employee’s salary or, alternatively, must match up to 3% of the employee’s personal contributions to the SIMPLE IRA plan. Companies can elect to cover all employees under the plan or may choose to cover only those employees who have earned at least $5,000 in two separate years preceding the establishment of the plan; whichever method is selected, it must be applied across-the-board to all employees of the company. Growing companies can continue their SIMPLE IRA for up to two years after exceeding the 100 employee limit; after that time, the company must convert the plan to another type of IRA. Small businesses may also choose to manage their SIMPLE IRA plan on their own or to obtain a plan through a financial institution.

Advantages and drawbacks

Both employer and employee contributions enjoy tax-deferred status until the SIMPLE IRAs are distributed. SIMPLE IRAs are usually administered and managed by financial institutions on behalf of the employer. Employees are 100% vested in their accounts from the first day they are established; this means that the accounts belong to the employee, regardless of the source of contributions. Distributions from SIMPLE IRAs are subject to an additional 25% taxation rate in the first two years of their existence; after that, a 10% tax rate over and above the normal rate applies to distributions taken before the account holder reaches 59 and 1/2 years. After two years from the employee’s date of participation, these plans can be rolled over into traditional IRA plans as with other types of IRAs. SIMPLE IRAs have lower employee contribution limits than most other types of IRAs due to the required matching funds provided by employers. Employee contributions are voluntary, but employer contributions are required for participation in these small business retirement arrangements. Overall, SIMPLE IRAs offer simplified bookkeeping and provide a convenient entry point for small business into the field of retirement benefits.
Tim Ord
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