If you’re looking for a straightforward way to help your employees save for retirement, then the SIMPLE IRA might be for you.
What is a SIMPLE IRA?
SIMPLE-IRAs. SIMPLE stands for Savings Incentive Match Plan for Employees. This is a traditional IRA that is set up for employees and allows both employees and employers to contribute.
If you’re an employer of a small business who needs to get started with a retirement plan, a SIMPLE IRA may be for you. SIMPLE-IRAs provide some degree of flexibility in that employers can choose to either offer a matching contribution to their employee’s retirement account or make nonelective contributions.
In addition, employees can choose to make salary reduction contributions to their own retirement accounts. Some small business owners opt for a SIMPLE-IRA because they find the maintenance costs are lower compared with other plans.
For a business to use a SIMPLE IRA, it typically must have fewer than 100 employees and cannot have any other retirement plans in place.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs blend employee and employer contributions. For example, some employers match employee contributions up to 100% of the first 3% of compensation. Others may contribute 2% of each eligible employee's compensation. It's up to the employer to decide the formula based on what works best for the business.
The SIMPLE IRA must cover employees who have earned at least $5,000 in any prior two years and are reasonably expected to earn $5,000 in the current year.
A lot of the other rules that apply to your typical IRA also apply to the SIMPLE. Distributions from SIMPLE-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.