Plan for Retirement: SIMPLE IRA

SIMPLE IRA - One of the easiest retirement accounts to set up and manage
SIMPLE stands for Savings Incentive 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 SIMPLE-IRA.

How to set up a SIMPLE-IRA?
There are three steps in setting up a SIMPLE IRA:

  1. 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 institution.

  2. 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.

  3. 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 maintained.

What is the last date for setting up a SIMPLE-IRA?
A SIMPLE IRA plan can be set up 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 SIMPLE IRA?
Employees may not make regular IRA 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 you to choose how you want your money invested which means you can buy individual stocks, mutual funds, ETFs, etc.

Heavy penalty for early withdrawals
There is a 25 per cent of entire 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. Also, 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 loans, employees cannot borrow from their SIMPLE IRA account.


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