SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs like a conventional retirement plan does.
What Are The Features of A SIMPLE IRA Plan?
1. Available to any small business – generally with 100 or fewer employees
2. Easily established by adopting Form 5304-SIMPLE, 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document
3. Employer cannot have any other retirement plan
4. No filing requirement for the employer
6. Employer is required to contribute each year either a:
7. Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
8. 2% nonelective contribution for each eligible employee
9. Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $255,000 for 2013 (subject to cost-of-living adjustments in later years)
10. Employees may elect to contribute
11. Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money
How Does A SIMPLE IRA Plan Work?
Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s compensation. Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution.
Elizabeth has a yearly compensation of $50,000 and contributes 5% of her compensation ($2,500) to her SIMPLE IRA. The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus Rockland’s $1,500 contribution). The financial institution holding Elizabeth’s SIMPLE IRA has several investment choices and she is free to choose which ones suit her best.
Austin works for the Skidmore Tire Company, a small business with 75 employees. Skidmore has a SIMPLE IRA plan for its employees and will make a 2% nonelective contribution for each of them. Under this option, even if a Skidmore employee does not contribute to his or her SIMPLE IRA, that employee would still receive an employer contribution to his or her SIMPLE IRA equal to 2% of compensation. Austin’s annual compensation is $40,000. Even if Austin does not contribute this year, Skidmore must still make a contribution of $800 (2% of $40,000).
What Are The Advantages and Disadvantages Of A SIMPLE IRA?
1. Easy and inexpensive to set up and operate
2. Employees share responsibility for their retirement
3. No discrimination testing required
4. Inflexible contributions
5. Lower contribution limits than some other retirement plans
Who Can Contribute To A SIMPLE IRA?
The employer must contribute and employees may contribute.
What About Participant Loans?
Participant loans are not permitted. The assets may not be used as collateral.
Are In-Service Withdrawals Allowed?
Yes, but amounts are includible in income and subject to a 10% additional tax if under age 59-1/2. Also, if withdrawals are made within the first two years of participation, the 10% additional tax is increased to 25%.
If you need assistance in deciding if a SIMPLE IRA Plan is right for your employees and your business, please don’t hesitate to call our office today.
As a CPA, Accredited Small Business Consultant and Advanced Certified QuickBooks ProAdvisor, we mentor small business owners to empower them with the tax, accounting, financial knowledge, and business skills to start, manage, and grow a successful business. Please allow us to evaluate your small business needs today. Give us a call at (727) 391-7373 or visit us at http://www.LStortzCPA.com.