SIMPLE IRA Rules

There are a few Simple IRA rules that must be addressed if you or your employer are thinking about starting up a Simple IRA retirement account. Simple, which stands for Savings Incentive Match Plan for Employees, is the latest type of retirement plan for small businesses. It offers a unique package of benefits.

First, an employer must meet certain standards in order to establish one these accounts. Simple IRA allow only employers who have 100 or less employees. If the owner starts out under the limit and crosses it, they can continue the program for two years before having to switch to another plan. Also, a Simple IRA requires a minimum contribution from the employer, unlike most other retirement plans. The employer can choose to either match employee contributions up to three percent of the employee’s income, or to contribute a set two percent of gross earnings to each employee’s account.

There are also Simple IRA rules for the employees of companies that have this type of retirement account. There are contribution limits, which usually are much more than a traditional or Roth IRA but quite a bit less than those of a 401k. These increase almost every year to accommodate inflation and the general increase in the cost of living. Also, as with most retirement plans, there is an additional ‘catch up’ contribution allowed for people who are fifty years of age or older. The catch up contribution most recently is $2,500.

The Simple IRA rules are easy to understand and easy to follow. Because the Simple IRA is less complicated than most types of employer sponsored retirement accounts, it usually has very low set up and administrative costs. This means that more employers will be willing and able to set up one of these accounts, and that more employees can have a more comfortable retirement thanks to the additional funds and the savings opportunity. It can even be used by self employed individuals, who normally have very few choices available to them.

As with all retirement plans, the Simple IRA rules allow for certain tax advantages. Any employer contribution to employee IRA accounts is one hundred percent tax deductible. Employers may also be able to claim a tax credit that would help with any start up costs incurred while opening a Simple IRA. Employee contributions to a Simple IRA account are also completely tax deductible, although they may be subject to Social Security tax in some cases. As with all IRA’s, once the money is in the IRA account, it can grow tax free with compounding interest until the employee reaches retirement age.

If you are an employer who doesn’t offer retirement benefits, you are placing yourself at a huge disadvantage in the workplace and in your field. If you are an employee without retirement benefits, it’s time to go to your employer and talk about how a Simple IRA can be a win-win situation for everyone involved. Planning for retirement is a necessary part of modern life, and the Simple IRA makes it an easy process.