Photo: Flickr user Lily.
With pensions going the way of the saber-toothed tiger, many workers increasingly rely on 401(k) accounts. Not all employers have the wherewithal to offer such plans, though. If you work for such an employer, you're not out of luck: You might be able to save money for retirement with a SIMPLE IRA -- so long as you follow the SIMPLE IRA rules.
Many people are unfamiliar with the SIMPLE IRA, less commonly known as the savings incentive match plan for employees individual retirement account. Most of us have heard of the top two IRA types, the traditional IRA and the Roth IRA. The traditional IRA takes pretax contributions, lowering your current tax bill, and then taxes withdrawals in retirement. The Roth offers no up-front tax break, but in retirement, you can withdraw your contributions and earnings tax-free. When you weigh these options against the SIMPLE IRA, though, you may find that the SIMPLE IRA rules.
The SIMPLE IRA permits small-businesses owners (and the self-employed, 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 contributions (up to 3% of the employee's compensation) or nonelective contributions (contributing a fixed 2% of income to every worker, whether they make their own contributions or not).
How it works
For starters, know that worker and employer contributions go into a SIMPLE IRA. The SIMPLE IRA rules regarding investment, distribution, and rollovers are the same as those that govern traditional IRAs.
The IRS offers lots of information on SIMPLE IRA rules, but here are some key things to know.
For 2014, the contribution limit for the SIMPLE IRA is $12,000 for most workers, plus an optional catch-up contribution of $2,500 for those aged 50 or older. That makes it a more powerful saving tool than a traditional or Roth IRA, which has a contribution limit of $5,500 plus a catch-up contribution of $1,000. It gets even better, too. Like a 401(k), the SIMPLE IRA permits dollar-for-dollar employer contribution matching of up to 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.)
Getting started
Another one of the key SIMPLE IRA rules requires that the employer have no more than 100 employees and offer no other retirement plans. Setting up a SIMPLE IRA involves filling out one or two forms and perhaps making a phone call. There are few to no filing requirements for the employer -- the financial institution managing the program takes care of that. Better still, employers may qualify for a tax credit of up to $500 for the first three years they offer a SIMPLE IRA in order to offset start-up costs.
SIMPLE IRAs are often set up with well-known 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 often wider than they are in most 401(k) plans.
The IRS offers a handy guide (link opens PDF) that reviews the SIMPLE IRA rules, and it's worth checking out. For example, you'll learn that eligibility is broad, with employees earning $5,000 per year (and sometimes less) qualifying for participation. Also, both employee and employer contributions are immediately vested, meaning that you don't forfeit any of it should you change jobs.
A glance at the SIMPLE IRA rules shows that this retirement plan is simpler for small-business owners than a 401(k) plan and simpler for self-employed people than the SEP IRA (though the SEP IRA has its own advantages). It's a great way to boost your retirement nest egg and those of your employees.
