The SIMPLE IRA can be great for small businesses and their employees.

Mar 22, 2014 at 1:00PM

The IRA world offers more options than a traditional IRA and a Roth IRA. There's the SIMPLE IRA, for instance, and it might be just what your retirement plan needs.

We all know that pensions have become endangered animals, phased out of many businesses over the past few decades and often replaced by 401(k)s. That's problematic for many people, as pensions generally involve little to no responsibility for the worker and offer defined ultimate payouts, while 401(k)s generally require employees to take certain actions (such as signing up, choosing contribution amounts, and deciding on investments) and offer little certainty about how much employees will get in retirement. Still, for many workers, a 401(k) account or some other retirement plan is their best option. Not all employers have the wherewithal to offer such plans, though.

Enter the SIMPLE IRA, which gets its name from the acronym for Savings Incentive Match Plan for Employees. It permits employers with small businesses (and self-employed folks, too) to contribute to retirement savings plans for their workers and themselves through a simplified system. Workers get to decide whether they want to make salary-reducing contributions, and employers must make matching or non-elective contributions. (A non-elective contribution would involve the employer contributing a fixed percentage of income to every worker, whether they make their own contributions or not.) Worker and employer contributions go into an Individual Retirement Account of Annuity (IRA) -- a SIMPLE IRA.

How it works
A SIMPLE IRA involves most of the same rules regarding contributions, distributions, and rollovers as those of a traditional IRA. You'll find lots of information on SIMPLE IRAs at the IRS website, but here are some key things to know.

For 2013 and 2014, contribution limits for the SIMPLE IRA are $12,000, with a catch-up contribution for those 50 or older of $2,500 also available. That makes it much more powerful than a regular IRA, with its contribution limits of $5,500 or $6,500. It gets even better, too. As with 401(k)s, it permits dollar-for-dollar employer matching contributions, of up to about 3% of your earnings. Your contributions, meanwhile, offer tax advantages. They're deducted from your taxable income, as they are for traditional IRAs (and 401(k) contributions). Thus they'll reduce your taxes due in the year of the contribution, and the money can grow tax-deferred until you withdraw it, ideally in retirement. (At that time, it will be taxed at your income tax rate.)

Among the various rules related to the SIMPLE IRA are that the employer must have no more than 100 employees and must offer no other retirement plans. Setting one up involves filling out just one or two forms and perhaps a phone call. There are few to no filing requirements for the employer -- the financial institution managing the program takes care of that.

SIMPLE IRAs are often set up with well-respected brokerages, and once you have money in a SIMPLE IRA account, you typically have a wide range of investments you can park it in, such as stocks, bonds, and mutual funds. The options are wider than with many 401(k) plans.

Consider holding some dividend-paying stocks in your IRA. A stock such as Philip Morris International (NYSE:PM), for example, offers a 4.7% dividend yield and likely stock-price appreciation as it sells tobacco products around the world and in emerging markets where growing middle classes will smoke more cigarettes. It's challenged, though, by increasing taxes and regulations in some markets. Its last quarter featured results that topped expectations, but volumes have been shrinking. Meanwhile, 3M (NYSE:MMM) offers a 2.6% yield and a recent 35% dividend hike. It has also been rewarding shareholders via share buybacks, planning to spend $12 billion on them. Bulls like its research and development investments and innovation, while bears point out fourth-quarter organic growth of just 3.4% and would like to see it growing faster.

Simpler for small business owners than a 401(k) plan and simpler for self-employed people than the SEP IRA, the SIMPLE IRA deserves consideration. It can get your retirement savings growing faster.

More from The Motley Fool
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Selena Maranjianwhom you can follow on Twitter, owns shares of 3M. The Motley Fool recommends and owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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