SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees.
- Available to any small business – generally with 100 or
- Easily established by adopting Form 5304-SIMPLE,
5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan
- Employer cannot have any other retirement plan
- No filing requirement for the employer
Employer is required to contribute each year either a:
- 1-Matching contribution up to 3% of compensation, or
- 2-2% nonelective contribution for each eligible employee (Editor’s
Note: We do not recommend this method of matching)
- Employees may elect to contribute for their pay between $1
and $13,000 (an extra $2,500 is allowed if you’re 50 or older making
the maximum $15,500)
- Employee is always 100% vested in (or, has ownership of) all
SIMPLE IRA money
(If you use the method that we
recommend, see number 1 above, the following does not apply.)
Under the “nonelective” contribution formula, even if an eligible
employee doesn’t contribute to his or her SIMPLE IRA,
that employee must still receive an employer contribution to his or her
SIMPLE IRA equal to 2% of his or her compensation
How does a SIMPLE
IRA plan work?
Elizabeth works for the Rockland Quarry Company, a small business with
50 employees. Rockland has decided to establish a SIMPLE IRA plan for
and will match its employees’ contributions dollar-for-dollar up to 3%
of each employee’s compensation.
Under this option, if a Rockland employee does not contribute to his
her SIMPLE IRA, then that employee does not receive any matching
Elizabeth has a yearly compensation of $50,000 and contributes 5% of
her compensation ($2,500) to her SIMPLE IRA. The Rockland matching
contribution is $1,500 (3% of $50,000).
Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year
is $4,000 (her $2,500 contribution plus Rockland’s $1,500 contribution).
The financial institution holding Elizabeth’s SIMPLE IRA has several
investment choices and she is free to choose which ones suit her best.
Example 2: (Again, we do not recommend this method for our
Austin works for the Skidmore Tire Company, a small business with 75
Skidmore has a SIMPLE IRA plan for its employees and will make a 2%
nonelective contribution for each of them.
Under this option, even if a Skidmore employee does not contribute to
his or her SIMPLE IRA, that employee would still
receive an employer contribution to his or her SIMPLE IRA equal to 2%
Austin’s annual compensation is $40,000. Even if Austin does not
contribute this year, Skidmore must still make a contribution of $800
(2% of $40,000).
- An employer generally has no
- Participant Loans: Not permitted. The assets may not be
used as collateral.
- In-Service Withdrawals: Yes, but includible in income
and subject to a 10% additional tax if under age 59-1/2.
- Also, if withdrawals are made within the first two years of participation,
the 10% additional tax is increased to 25%. (This differs from other
early withdraw penalties.)