Rules of Simple IRA Your Business Needs to Know

A Savings Incentive Match Plan for Employees plan, better known as a SIMPLE plan, is an IRA-based retirement plan available to employers with fewer than 100 employees.

Under a SIMPLE IRA plan, an employee can contribute a portion of his pay to his SIMPLE IRA account. An employee can make a maximum contribution of $9,000, ($10,500 if age 50 and over), to his SIMPLE IRA account for 2004. You, the employer, are required to make a contribution for every worker who receives $5,000 or more in compensation.

You can match up to 3% of the salary for the employees who contribute to their SIMPLE IRA account. You only have to match for those employees who contribute to the plan. In any 2 years out of a 5 year period, after notification to the employees, you may elect a lower matching contribution percentage but not less than 1% of salary.

Your business also has the option to select a "non-elective" mandatory company match of 2% of annual salary for every employee. Under the "non-elective" contribution formula, even if an eligible employee doesn't contribute to his SIMPLE IRA, you must still contribute to his account 2% of his salary.

Advantages of the SIMPLE IRA

• Less expensive than a 401(k)

Disadvantages of the SIMPLE IRA

• A special tax penalty of 25% unique to the SIMPLE IRA for withdrawals made within the first two years of opening a SIMPLE plan. (Congress is considering eliminating this tax).

• A SIMPLE IRA is much less flexible than a 401(k) plan.

• Employer must make contributions for all eligible employees.

• No contributions can be made to other qualified retirement plans.

• All contributions are immediately vested, meaning all contributions belong right away to the employee.

• A SIMPLE IRA plan can only be terminated prospectively, beginning no earlier than the next calendar year. Contributions must continue until the plan is terminated.

• A SIMPLE IRA must be set up at least 60 days prior to year end. Thus, October 1, is the last day to set up a new SIMPLE IRA for the calendar year.

• No loans allowed.

While the SIMPLE IRA make senses under certain circumstances, this plan comes with a lot of strings attached. If your business has no employees and you do not expect to hire employees in the near future, consider using a Solo 401(k) with a loan feature instead of a SIMPLE IRA. And, if you have more than 20 employees, look at setting up a regular 401(k) as an alternative.

To terminate a SIMPLE IRA plan, notify the financial institution that you chose to handle the SIMPLE IRA plan that you will not be making contributions for the next calendar year and that you want to terminate the contract or agreement with it. You must also notify your employees that the SIMPLE IRA plan will be discontinued.

About The Author

Daniel Lamaute, CEO of Lamaute Capital, Inc. (www.InvestSafe.com) specializes in setting up retirement plans. You may visit http://www.investsafe.com to access a free calculator that will help you estimate what your maximum contribution might be under different plans.

---

Well Managed Investing Risks Bring Rewards!

"Risk comes from not knowing what you're doing!" Warren Buffett... Read More

In a Time of Need

As I take my leisurely walk with my dog through... Read More

Bad News - Why The Financial News Media Can Cost You Money!

The communication innovations we have around us today like the... Read More

Keeping It Interesting

Some lines from a movie never leave your mind; I... Read More

Getting Started In Investing

Are you ready to open your pathway to financial independence?Well... Read More

Why You Need To Buy and Sell Gold Coins (Part 5)

Grading coinsThe condition of a coin is commonly summarized by... Read More

What Age Should I Start Saving For Retirement?

Ask this question to 100 people and you will receive... Read More

Trading Expert Discovers Ways To Beat Stock Market Odds With Money Management

The first point to mastering money management is that you... Read More

Mutual Fund Selection Made Simple By Indexing!

Non-indexed mutual funds try to keep it secret that actively... Read More

Boost Your Income With Financial Spread Betting

About 6 years ago I started to notice that certain... Read More

IF - The Wonders of Investing

If it seems... Read More

An Old Dividend Stock Investment Idea, for a New Generation

Death and taxes! The certainties of life! And then, of... Read More

Global Markets: A Window on the World Economy

Expectations drive the market. Every stock price is driven by... Read More

Discover the Foundation of Retiring Wealthy - The IRA!

Let me tell you about some legal ways to avoid... Read More

Lobster Trapping for Investment Ideas

Recently, my family and I took a trip to Maine... Read More

Love The Thrill of Risk? Invest in an Annuity!

With the stock market in steep decline, people are looking... Read More

To Retire Rich, Save and Invest Early

If you want to retire rich, start saving investing early.... Read More

Wit and Wisdom on Money, Wall Street and Success - Part #4

Can you concisely summarize your investment philosophy in a few... Read More

Remembering TEOTWAWKI and Learning from It

Its only been about 5 years since we had major... Read More

Building The Foundation For Wealth

You wouldn't build your home on anything less than a... Read More

Annuity Investment Guide

While there is not a lack of information on annuities,... Read More

Lessons in Transition

Q: What have been the most successful approaches to attracting... Read More

Rolling your 401k: Contributory IRA vs. Rollover IRA

In an ideal world you would start your working career... Read More

Powerful Options Basics Lessons Improving your trading in 180 days.

An option is a traded security that is a derivative... Read More

The High Price of Oil

In less than four years, the price of oil has... Read More