Simple Ira

A SIMPLE IRA is a type of employer-provided retirement plan in the United States. Specifically, it is a type of Individual Retirement Account that is set up to be an employer-provided plan. It is a qualified plan, like more well-known plans such as the 401(k) (profit-sharing plans) and 403(b) (Tax Sheltered Annuity plans), but offers simpler and less costly administration rules. Like a 401(k) plan, the SIMPLE IRA is funded by a pretax salary reduction. Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans: $10,000 for 2006, as compared to $15,000 for convention defined contribution plans (Section 402(g) limit) like 401(k), 401(a), and 403(b) plans. For the non-profit 501(c)(3) employer, there is no advantage in establishing a simple plan over a 403(b) plan since the 403(b) does not require any more expensive administration. Some retirement plan consultants question choosing the SIMPLE over the SEP.^{[citation needed]}

Technicalities

• The term "SIMPLE" stands for "Savings Incentive Match Plan for Employees".
• Only an "eligible employer" may establish a SIMPLE IRA. An "eligible employer" is one with no more than 100 employees. (An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100 employee limit.)
• Employees may not make regular IRA contributions to their SIMPLE IRA account.
• The plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% (subject to certain rules that allow for lower contributions—see IRC Sec. 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year, regardless of the amount the employee contributes.
• A catch-up provision is available for participants over the age of 50. The extra catch-up contribution allowed is $2,500 for 2006, as compared to $5,000 catch up available in a 401(k), 403(b), and 457 plans.
• The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).
• Unlike a 401(k), a SIMPLE IRA cannot be rolled over to a traditional IRA without a waiting period (two years from the date the employee first participated in the plan).
• SIMPLE IRAs allow for smaller contribution limits than 401(k) or Deferred Contribution Plans.

See also

• 401(k)
• 403(b)
• 457 plan
• SEP IRA
• List of finance topics
• Personal finance

References

• Department of the Treasury, Internal Revenue Service. Publication 590: Individual Retirement Arrangements (IRAs) 2004 Pages 62-65 100 pg pdf file
• Littell, David and Tacchino, Kenn. Planning for Retirement Needs 5th ed. 2002, The American College, Bryn Mawr PA. ISBN 1-57996-039-1

Donate to Wikimedia