Simple Retirement Plan Rules
A SIMPLE IRA is a retirement plan created to meet the needs of small business owners with less than 100 employees. The acronym SIMPLE stands for Savings Incentive Match PLan for Employees. SIMPLE plans were created by the US Government to give small businesses the ability to create plans to compete with 401k options available at larger employers. Although termed an "IRA," SIMPLE plans have their own special rules.
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Plan Must Be Created By October 1st
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October 1st deadline Employers may adopt an IRS model SIMPLE IRA plan by either using IRS Form 5305-SIMPLE if each employee contribution will be directed to the same financial institution, or IRS Form 5304-SIMPLE if employees will be allowed to choose their own institution to accept contributions. Besides the IRS website, banks, brokerage houses and other qualified SIMPLE custodians may provide prototype SIMPLE IRA plans.
Employers Have Two Options To Match Funds
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Employers match contributions Employers are required to match employee contributions dollar-for-dollar up to 3% of the employee's deferred compensation, or 2% of an employee's overall compensation regardless of employee deferral level. Employers may elect to limit contributions to employees who earn $5,000 or more. Additionally, employers are allowed to reduce matching to 1% in any two years out of five.
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Employee Contributions May Be Larger Than IRA Limits
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Employees may make significant contributions Employees may contribute all or a portion of their salaries to the SIMPLE IRA, up to limits indexed each year for inflation. In 2010, employees could contribute up to $11,500, or $14,000 if over age 50.
SIMPLE IRA Accounts Grow Tax-Deferred
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SIMPLE Funds grow tax-deferred Funds inside a SIMPLE IRA may be invested in many options inside the plan. Employers may choose a plan with limited choices or a plan that allows employees to choose their own investment options. Dollars are invested pre-tax and grow tax-deferred until withdrawn. If funds are removed before age 59½ there are generally early-withdrawal penalties. SIMPLE IRAs are subject to age 70½ required minimum distribution laws.
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References
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