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Form of Salary Reduction Plan that qualifying small employers may offer to their employees. Simple stands for Savings Incentive Match Plans for Employees. Employers with no more than 100 employees earning $5,000 or more in a year who do not offer any other retirement plan can offer Simiple Iras. Self-employed workers also are eligible to establish these accounts.

Workers offered a Simiple Ira may contribute up to $10,000 per year into the account. Employees age 50 or older can contribute up to $12,500. Employee contributions are excluded from taxable pay on Form W-2 and are not subject to income tax withholding, although Social Security taxes are paid on those earnings. While the employer may pick the financial institution in which to deposit the simple IRA funds, employees have the right to transfer the funds to another financial institution of their choice without cost or penalty.

Employers must make either a matching contribution or a fixed "non-elective" contribution to their employees' accounts each year. If the employer chooses matching contributions, the employer must match the amount the employee contributes up to 3% of compensation. Or the employer may make a non-elective contribution of 2% of wages for each eligible employee.

Distributions from simple IRAs follow the same rules as regular IRAs, with one exception. If premature distributions are taken before the employee reaches age 591⁄2 and during the first two years after the employee starts participating in the plan, the penalty is 25%, not the usual 10%. After the first two years, the regular 10% penalty applies to pre-age 591⁄2 withdrawals. Withdrawals taken after age 591⁄2 are fully taxable at regular income tax rates, and mandatory withdrawals must begin at age 701⁄2, according to IRS life expectancy tables.

Assets inside simple IRAs can be invested like any other IRAs, in stocks, bonds, mutual funds, bank deposits, annuities, or precious metals.

The simple IRA replaced the Salary Reduction Simplified Employee Pension plan (known as SARSEP) in 1997. SARSEPs may be continued only by employers who established them before 1997. See also Simplified Employee Pension (SEP) Plan.

 
 
Wikipedia: 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

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

 
 

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Copyrights:

Financial & Investment Dictionary. Dictionary of Finance and Investment Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.  Read more
Wikipedia. This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "SIMPLE IRA" Read more

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