SIMPLE IRA Plans
A SIMPLE IRA plan is a small business retirement plan for companies with 100 or fewer employees. SIMPLE IRA plans are less expensive and less complex than 401(k) plans or pension plans. SIMPLE IRA plans are regulated by the IRS.
Money contributed to an employee’s SIMPLE IRA by a business is tax deductible for the company. Employee contributions are made with pretax dollars and are not included in the employee’s income for tax purposes. Furthermore, all money invested inside of a SIMPLE IRA grows tax-deferred.
A SIMPLE must be established by a business. Contributions to employees are deposited into IRA accounts attached to the plan, and known as SIMPLE IRAs. Each employee owns his own SIMPLE IRA account. A business may not place any restrictions on withdrawals from a SIMPLE IRA, nor make contributions to the account a condition of employment.
However, withdrawals from a SIMPLE IRA are considered income and subject to ordinary income taxes. In addition, withdrawals made before the account owner is 59 1/2 may be subject to a 10 percent tax penalty. Like a tradtitional IRA, SIMPLE IRA accounts are subject to required minimum distributions. When the account owner reaches age 70 1/2 a minimum withdrawal, known as an RMD, must be taken each year from the account.
There is no loan provision or provision for hardship distributions in a SIMPLE IRA. This is different than 401k plans which may offer a hardship distribution provision or may offer employees a 401k loan provision.
SIMPLE IRA Contribution Limits for 2011
Employee contributions to a SIMPLE IRA are made via salary deferral. The employee may specify either a percentage of salary or a specific amount to be deferred into her SIMPLE IRA up to the maximum contribution limit. The 2011 SIMPLE IRA contribution limit is $11,500 annually. However, employess age 50 and older may make an additional catch-up contribution of up to $2,500 each year for a total annual contribuiton of $14,000 in 2011.
There are also SIMPLE IRA contribution limits for employer contributions. Employers must generally make either a dollar for dollar matching contribution up to 3 percent of salary or a 2 percent non-elective, non-matching contribution to every employee. However, employers may make reduced contributions for a calendar year. In these cases, the employer may match as little as 1 percent as long as the match is not reduced more than 2 out of every 5-years.
The maximum employee compensation allowed for use in these calculations is $245,000. For a 3 percent matching contribution, that limits employer contributions to $7,350 and for a 2 percent non-elective contribution, the employer contribution limit is $4,900.
Image courtesy of the IRS.