SIMPLE IRA
From Wikipedia, the free encyclopedia
A SIMPLE IRA is a type of employer provided retirement plan in the United States. Specifically, it is a type of Individual Retirement Account that is set up to be an employer provided plan. It is a qualified plan like more well known plans such as the 401(k) (profit sharing plans) and 403(b) (Tax Sheltered Annuity plans), but offers simpler and less costly administration rules. Like a 401(k) plan, the SIMPLE IRA is funded by a pre-tax salary reduction. Contribution limits for SIMPLE plans are lower than for most other types of employer provided retirement plans, $10,000 for 2006 as compared to $15,000 for convention defined contribution plans (Section 402(g) limit) like 401(k), 401(a) and 403(b) plans. For the non profit 501(c)(3) employer, there is no advantage in establishing a simple plan over a 403(b) plan since the 403(b) does not require any more expensive administration. In addition with the SEP IRA which is even more simple than the SIMPLE, some retirement plan consultants question choosing the SIMPLE over the SEP.
[edit] Technicalities
- The term SIMPLE IRA stands for Savings Incentive Match Plan for Employees
- Only an "Eligible Employer" may establish a SIMPLE IRA. An "eligible employer" is one with no more than 100 employees. (An employer who has already established a SIMPLE IRA may continue to be "eligible" for two years after crossing the 100 employee limit.)
- Employees may NOT make regular IRA contributions to their SIMPLE IRA account.
- The plan requires a certain minimum contribution from the employer. The employer may either match the contributions of employees dollar for dollar up to 3% (subject to certain rules that allow for lower contributions -- see IRC Sec 408) or the employer may contribute a flat 2% of compensation for each employee with at least $5,000 in compensation for the year regardless of the amount the employee contributes.
- A catch up provision is available for participants over the age of 50. The extra catch up contribution allowed is $2,500 for 2006, as compared to $5,000 catch up available in a 401(k), 403(b), and 457 plans.
- The SIMPLE plan can technically be funded with either an IRA or a 401(k). There is almost no benefit to funding it with a 401(k), since the lower contribution limits of the SIMPLE are required as is the expensive extra administration of the 401(k).
- Unlike a 401(k), a SIMPLE IRA cannot be rolled over to a traditional IRA without a waiting period (2 years from the date the employee first participated in the plan).
- SIMPLE IRA allow for smaller contribution limits than 401(k) or Deferred Contribution Plans
[edit] See also
[edit] References
- Department of the Treasury, Internal Revenue Service. Publication 590: Individual Retirement Arrangements (IRAs) 2004 Pages 62-65 100 pg pdf file
- Littell, David and Tacchino, Kenn. Planning for Retirement Needs 5th ed. 2002, The American College, Bryn Mawr PA. ISBN 1-57996-039-1
