What is a SIMPLE IRA?
The SIMPLE IRA is an employer sponsored retirement plan available to small businesses with less than 100 employees including sole
proprietorships, partnerships, S corporations and C corporations.
A Simple IRA is easy to set up and has low administrative responsibilities.
2012 Simple IRA contribution limit is $11,500 or $14,000 if age 50+. In addition there is a maximum 3% employer contribution.SIMPLE IRA's
consist of 2 parts: an optional employee salary deferral and a mandatory employer match. SIMPLE IRA's are easy to administer and IRS filings are
not required. SIMPLE IRAs must be established by October 1st in order to contribute to a plan for the current year.
With a SIMPLE IRA, eligible employees can elect to contribute by salary deferral (like a 401k plan). In 2011 and 2012 employees can elect to defer
up to 100% of their income up to a maximum of $11,500 or $14,000 for those age 50 or older. 401k participants age 50 or older are permitted to
make an additional $2,500 catch-up contribution. In general, contributions made by an employee are 100% tax deductible and investment earnings
grow tax deferred and can be withdrawn after age 59 1/2. Withdrawals prior to age 59 1/2 are likely to incur taxes as well as IRS penalties for
Employers must make mandatory contributions into a SIMPLE IRA on behalf of their eligible employees and into their own SIMPLE IRA account. In
general, employer SIMPLE IRA contributions made into these accounts are 100% tax deductible. Contributions must be made annually by the
employer's tax filing deadline (including extensions).
Employer contributions can be made in one of the following ways:
A 3% employer match is made only for those employees electing to defer a portion of their salary. Employers match employee salary deferrals
dollar for dollar up to 3% of employee compensation. An employer can reduce the employer's match to 1% of each participating employee's
compensation for any two years in a five year period.
A 2% employer contribution based on an employee’s compensation (up to $4,900 in 2011 and $5,000 in 2012) for all eligible employees
regardless of whether the employee is electing to defer a portion of their salary or not.
SIMPLE IRAs are very inexpensive to maintain and their costs vary, but may cost approximately $15-$25 annually per employee account.
Relatively low maximum annual contribution limits.
Loans are not permitted
$11,500 or $14,000 if age 50+. As a result, significant contributions can be made into a Simple IRA even at lower income levels. A good candidate
for this plan doesn't mind the relatively low maximum contribution limits. Self employed individuals who would like to contribute in excess of the
limits of a Simple IRA should consider a Solo 401k since it has higher contribution limits.
Note on the Simple IRA:
Employers who would like to sponsor a retirement plan but who do not want to make contributions to employees accounts may want to consider a
401k. A business owner with employees must weigh the SIMPLE IRAs benefits of low administrative fees but the requirement of the employer
match versus a 401k which has much higher administrative fees but does not require an employer match. Contact us if you need clarification.