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SIMPLE IRA: The Simplest Nest Egg

by: sahil | last updated: August 21, 2010
Category: Personal Finance | Tags: IRA, simple IRA, Savings Incentive Match Plan for Employees, retirement, nest eggs, Individual Retirement Account

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SIMPLE IRA: The Simplest Nest Egg

A Savings Incentive Match Plan for Employees IRA or a SIMPLE IRA is a tax advantaged employer-provided retirement plan in the United States that permits workers to set aside funds and invest it to develop for later use. Explicitly, it is a sort of Individual Retirement Account that is set up to be an employer-provided plan. It is a company funded arrangement, similar to more renowned plans such as the 401(k) (profit-sharing plans) and 403(b) (Tax Sheltered Annuity plans), but presents less complicated and less expensive management rules.

Similar to a 401(k) plan, the SIMPLE IRA is financed by a pretax income cutback. Similar to other pay reduction contributions, these subtractions are subject to social security, and medicare taxes. Contribution restrictions for SIMPLE plans are lesser than for the majority other sort of employer offered retirement plans: $11,500 for 2010, in contrast to $16,500 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) company, there is no benefit in setting up a SIMPLE plan over a 403(b) plan because the 403(b) does not need any more costly administration.

Only an “eligible employer” can set up a SIMPLE IRA. A qualified company or employer is one with merely 100 workers. An employer who has already set up a SIMPLE IRA can continue to be “eligible” for two years after crossing the 100 employee boundary. Workers may not make normal IRA contributions to their SIMPLE IRA account. The plan requires a certain minimum contribution from the employer. The employer can either match the contributions of workers dollar for dollar up to three percent (subject to some rules that agree to lesser contributions - see IRC Sec. 408) or the company can put in an even 2% of reimbursement for each worker with no less than $5,000 in recompense for the year, not considering of the amount the worker or employee contributes.

The employee contribution maximum value is $11,500 for 2009, and $11,500 for 2010. A catch-up provision is accessible for contributors over the age of fifty years. The additional catch-up contribution allowable stays $2,500 for years 2009 and 2010, in contrast to $5,500 catch up obtainable in a 401(k), 403(b), and 457 plans. The SIMPLE plan can in principle be financed with either an IRA or a 401(k). There is nearly no advantage to funding it with a 401(k), because the lesser contribution limits of the SIMPLE are necessary as is the costly extra administration of the 401(k). Dissimilar to a 401(k), a SIMPLE IRA cannot be rolled over to a Traditional IRA without a waiting phase (two years from the day the worker originally contributed in the plan).