Definition
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a type of retirement savings plan that allows small employers to offer a retirement benefit to their employees. The plan is specifically designed for employers with no more than 100 employees earning $5,000 or more annually who do not offer any other retirement plan. Self-employed workers are also eligible to establish SIMPLE IRAs.
Key Features
- Eligibility: Available to small employers with 100 or fewer employees earning at least $5,000 annually. Self-employed individuals can also set up a SIMPLE IRA.
- Employee Contributions: Workers can contribute up to a specific limit each year ($11,500 for 2010 and 2011). Employees aged 50 or older can make additional catch-up contributions ($2,500 for 2010 and 2011).
- Tax Treatment: Employee contributions are excluded from taxable income on Form W-2 and are not subject to income tax withholding but are subject to Social Security taxes.
Examples
Example 1: Small Business Employer A small business with 50 employees each earning $6,000 annually decides to offer a SIMPLE IRA. Each worker can contribute up to the annual limit, and the employer agrees to match their contributions up to 3% of their salary.
Example 2: Self-Employed Worker A freelance graphic designer earning $70,000 per year decides to establish a SIMPLE IRA. They contribute the maximum allowed amount annually to reduce their taxable income and save for retirement.
Frequently Asked Questions (FAQs)
Q: Who is eligible to participate in a SIMPLE IRA? A: Employers with 100 or fewer employees who earn $5,000 or more annually and do not offer another retirement plan can offer a SIMPLE IRA. Self-employed individuals are also eligible to participate.
Q: What are the contribution limits for a SIMPLE IRA? A: The contribution limits for SIMPLE IRAs can vary by year. For instance, in 2010 and 2011, employees could contribute up to $11,500 per year. Employees aged 50 or older could contribute an additional $2,500 annually as a catch-up contribution.
Q: How are SIMPLE IRA contributions taxed? A: Employee contributions to a SIMPLE IRA are excluded from taxable income, meaning they reduce the employee’s taxable income for the year. However, these contributions are subject to Social Security taxes.
Q: Can employers contribute to a SIMPLE IRA? A: Yes, employers are required to either match employee contributions (up to 3% of the employee’s salary) or contribute a flat 2% of each eligible employee’s compensation.
Related Terms
- 401(k): A retirement savings plan offered by many American employers that has tax advantages for both employees and employers.
- SEP IRA: A Simplified Employee Pension Individual Retirement Account, commonly used by small business owners and self-employed individuals.
- Traditional IRA: An individual retirement account where contributions may be tax-deductible, and investments grow tax-deferred until retirement.
Online References
- IRS SIMPLE IRA Plan FAQs: IRS.gov
- Employee Benefit Research Institute: EBRI.org
- Financial Industry Regulatory Authority (FINRA): FINRA.org
Suggested Books for Further Studies
- Savings Incentive Match Plans for Employees (SIMPLE IRAs): A Starter Kit for Small Business Owners by Joseph Cordes
- **Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches by Bruce J. McCord
- **IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment by Patrick W. Rice
Fundamentals of SIMPLE IRA: Retirement Planning Basics Quiz
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