How to Compare Rates of Return on Simple Bank IRAs

SIMPLE stands for "Savings Incentive Match Plans for Employees." If you are self-employed or work for an employer with one hundred or fewer employees and no other retirement plans, a SIMPLE IRA may be for you.
For 2010, SIMPLE IRAs allow contributions of up to $11,500 per year ($14,000 for those ages 50 and older) plus up to 3 percent of your salary matched by your employer. These contributions are subject to Social Security taxes, but not Federal income taxes. While your employer may pick the financial institution for this account, there is no penalty for changing to an institution with better options. By comparing return rates, you may find superior returns for your SIMPLE IRA.

Instructions

1. Compare investment options available directly on the financial institution's website. TD Ameritrade, Fidelity Investments, Schwab, Vanguard and T. Rowe all have SIMPLE IRA accounts and easy to navigate websites. Most websites include analytical tools to guide you in your decision-making process, including assistance in assessing your personal risk tolerance.

2. Determine the type of investment. SIMPLE IRAs may be invested in mutual funds, bonds or bond funds, stocks or any combination of these. Morningstar.com compares mutual fund and bond fund returns along with associated fee structures. Individual bonds and stock returns are listed daily in financial publications such as Investor's Business Daily or on a variety of investment websites.

3. Compare fees for the chosen options. Fund fees may include management or maintenance fees, sales commissions, excessive trading fees, and account transfer fees. High fees will eat into the investment's earnings and could have a drastic impact on the funds available for retirement. The Financial Industry Regulatory Authority (FINRA) shows the impact of fund fees on your earnings over time.

4. Select your financial institution. Your ideal choice will offer SIMPLE IRAs, a combination of investment choices, and low fees.

Tips & Warnings

• Employers may also offer matching contributions to your plan. Typical scenarios are an employer offering up to 3 percent of your annual salary or making a flat 2 percent contribution. Check with your employer to make sure you are contributing enough to be eligible for the highest match possible. Your employer's match is free money for you so you don't want to leave any on the table.

• Withdrawal penalties of 25 percent will be assessed by the IRS for distributions taken within two yeas of the first contribution. There is an additional 10 percent penalty if the recipient is under 59.5 years old.

• Some institutions charge high fees for closing an account or moving it to another financial institution. Check all fees before choosing a provider.

References

• IRS: Simple IRA Plan
• Investopedia: Simple IRA vs Simple 401k plans

Resources

• Morningstar Fund Rating
• FINRA Fund Analyzer