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.