Simple IRA

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.

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.

Employee Contributions

With a SIMPLE IRA, eligible employees can elect to contribute by salary deferral (like a 401k plan). Employees can elect to defer up to 100% of their income up to a maximum of $11,500 for the 2009 year or $14,000 if age 50+. 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general, contributions made by an employee are 100% tax deductible and investment earnings grow tax deferred and can be withdrawn after age 59 1/2.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 penalties for premature withdrawal.

Employer Contributions

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:

1. 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 (up to a maximum of $11,500 or $14,000 if age 50+ in 2009). 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.
    
2. A 2% match of employee compensation (up to $4,900 in 2009) for all eligible employees regardless of whether the employee is electing to defer a portion of their salary or not.

SIMPLE IRA's are very inexpensive to maintain and their costs vary, but may cost approximately $25-$50 annually per employee account.

Note:

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.

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Disclosures:

* The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.