Simple IRA Rules

A small business owner who wants to provide a retirement plan for his employees may choose to set up a Simple IRA plan. As its name suggests, a Simple IRA is easy to establish and simple to maintain. Similar to a 401(k) plan, the Simple IRA allows employers to contribute to workers' retirement savings. The idea is to encourage employees to consistently put away money in a tax deferred retirement plan that will grow over time.

Function

To qualify to set up a Simple IRA Plan, a business owner may employ up to 100 workers. Each employee who earns a minimum of $5000 during a calendar year is eligible to participate in the Plan. A financial institution, such as a bank or a brokerage company, administers the program and an individual Simple IRA is set up for each eligible worker.

Features

An employee can currently contribute up to $10,500 per year to his Simple IRA. An employer may match that contribution up to 3 percent of the worker's salary. Or, if the employer chooses, he can contribute a flat 2 percent of an employee's salary. If the employer chooses to use the flat 2 percent rate, he must contribute to the eligible employee's Plan even if the employee chooses not to contribute.

Time Frame

The rules for withdrawing funds from a Simple IRA are similar to those of the Traditional IRA Typically you must be 59 ½ years old before making withdrawals to avoid a 10 percent penalty. In addition, if you are under 59 ½ you must wait at least two years from the time you begin a Simple IRA to make withdrawals or you will pay a penalty of 25 percent.

Benefits

Simple IRA rules allow for an employee over 50 years old to contribute an additional $2500 to his plan each year. The business owner may take a tax deduction equal to the amount he contributes to a Simple Plan. If an employee changes jobs, he may roll over his Simple IRA into another Simple IRA without any tax consequence. The earnings on the investments inside a Simple IRA are not taxed until withdrawals are taken in retirement.

Considerations

Find out what investment choices the plan administrator offers. If you are risk averse, choose products like certificates of deposit to fund your Simple IRA. If you have a long time horizon in which to invest, you may want to invest in stocks or mutual funds.

Resources

• IRS information on SIMPLE IRA Plans
• Simple IRA - Frequently asked questions