SIMPLE IRA – One of
retirement accounts to set up and manage
SIMPLE stands for Savings
Match Plan for Employees and IRA stands for Individual Retirement
Account. This plan includes accounts where the employees contribute
part of their salary and the employer contributes a matching or
non-elective amount. Employees could also choose to contribute a
percentage of their compensation, or even a fixed amount, up to a
maximum per year. The IRS Publication 560, Retirement Plans for Small
Business specifies these limits.
Only an employer with not
more than 100
employees is allowed to set up this plan. However, any employer who
has set up the SIMPLE IRA and crosses the 100-employee limit
afterward is allowed to continue with the plan for two years.
However, you have to make $5000 a year to qualify for setting up a
How to set up a
There are three steps in
setting up a
You have to adopt an IRS
model SIMPLE IRA plan using either Form 5305-SIMPLE (if all
contributions are required to be deposited initially at a designated
financial institution) or Form 5304-SIMPLE (if each employee is
permitted to choose the financial institution for receiving
contributions). You can obtain a prototype from any financial
Employees have to be
informed in written about the Plan, contributions, etc. The information
has to be given to each 60 days before January 1 of a calendar year.
The SIMPLE IRA is owned
and controlled by the employee and the SIMPLE IRA plan contributions
are sent to the financial institution where the SIMPLE IRA is
What is the last date for
A SIMPLE IRA plan can be set
effective on any date between January 1 and October 1, provided the
plan sponsor did not previously maintain a SIMPLE IRA plan. If a
SIMPLE-IRA plan was previously established, a SIMPLE IRA plan may be
set up effective only on January 1.
What are the
contributions to a
Employees may not make
contributions to their SIMPLE IRA account.
If you are the employer then you must match your employee’s
contribution on a dollar-for-dollar basis up to 3 per cent of the
compensation due to him. If you choose the non-elective
contributions, then you give 2 per cent of the compensation.
For your own SIMPLE IRA as a
self-employed person you contribute a percentage of your net earnings
plus either the matching contribution of up to 3% of your net
earnings, or the non-elective contribution of 2% of your net
earnings. There is no federal tax on the amount employees elect to
contribute to the SIMPLE IRA plan, or on the contributions you make
as the employer. Salary reduction contributions are subject to Social
Security, Medicare and federal unemployment taxes. However, the
matching or non-elective contributions you make as the employer are
not subject to these taxes. An employee contribution limit is
$11,500 for those below 50 years of age and $14,000 for those more
than 50 years old.
Also, the SIMPLE -IRA allows
choose how you want your money invested which means you can buy
individual stocks, mutual funds, ETFs, etc.
Heavy penalty for early
There is a 25 per cent of
distribution for taking a distribution from a simple IRA and/or
rolling over the account to a rollover IRA without waiting for two
years from the date of the first contribution.
if the account holder is not yet 59 years and six months old and
wants to withdraw some money there is an extra penalty of 10 per cent
(plus standard income taxes).
No loans with SIMPLE-IRA
Unlike 401(k) provisions for
employees cannot borrow from their SIMPLE IRA account.