The SIMPLE IRA stands for Savings Incentive Match Plan for Employees. This plan allows the employer as well as the employee contribute to traditional IRAs. It is a great plan to start with if you are new to building retirement savings through your business. The SIMPLE IRA elective deferral limit in 2014 for a participant under age 50 is the lesser of 100% of compensation for the year or $12,000. The employer matches dollar for dollar up to 3% of employees earned income. An alternative to matching 3% would be matching 2% of all wages including non-participants. Any employee who received at least $5000 in wages is eligible to participate.

SIMPLE IRA Example

Lacy earns $60,000 working for Fitness, Inc. owned by George who hires a total of 3 people. George establishes a SIMPLE IRA plan for his employees and chooses the 3% match. Under the 3% match option, George will contribute $1,800 to Lacy’s SIMPLE IRA Plan if Lacy choses to contribute 5% of her income.

Let’s rework the example above only this time George decides to use the 2% option. With the 2% option, George must contribute $1,200 whether or not Lacy choses to contribute to her retirement.

As a self-employed owner you are considered both an employer and the employee of your business.

SIMPLE IRA – Other Considerations

Unlike the SIMPLE IRA, employers must contribute and employees only contribute as they see fit. On the up side, employers know in advance what their commitment will be. This could help the employer budget better. Below are some other advantages:

1. This plan is available to any small business with 100 or fewer employees
2. Can be a significant source of retirement income
3. Little administrative time or cost

Downside

1. Employer cannot have any other retirement plan
2. The employer is required to contribute ( This could also be considered an advantage as it helps you retain employees)

SIMPLE IRA Deadline

A SIMPLE IRA can be set up between January 1 through October 1 of the current year as long as no other SIMPLE IRA plan exist. The SIMPLE IRA must be set up before before the first date of contribution. The amount must be deposited into the account within 30 days of the payday the funds were withheld. The employer matching funds are due by the due date of the tax return including extensions.

Early Withdrawal

It is not advisable to take a withdrawal within the first 2 years as the 10% penalty is increased to 25%.

 

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