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The definition of "SIMPLE IRA" is not as simple as it sounds, but something every small business owner must know and understand before setting up a retirement program.
First, "SIMPLE" stands for "Savings Incentive Match Plan for Employees." It is an IRA-based individual retirement arrangement provided by an employer. This allows the employee to set aside money and subsequently invest it for use in the future. Employees are not, however, allowed to make regular IRA contributions to their SIMPLE account.
This is not a 401(k) or a 403(b) plan, although it is funded by a salary reduction of a pretax sum and can be funded with either an IRA or a 401(k). There are few advantages to fund this plan with a 401(k), however. These deductions are subject to FUTA, Medicare and Social Security taxes. A SIMPLE IRA is tax-deferred and boasts many advantages over a 401(k) or a 403(b) plan.
This individual retirement arrangement cannot be transferred or rolled over to a traditional IRA unless there is a waiting period of approximately two years. It generally offers a less complex and cheaper set of administrative rules. A SIMPLE plan also requires lower contribution limits than other Individual Retirement Accounts such as a 401(k) or a Deferred Contribution Plan. If the employer wishes to withdraw his or her money early, there is a considerable early withdrawal penalty. The IRS assesses a fee of 25% of the entire distribution if the employer wishes to either roll over the account to a separate, new or existing IRA, or if they simply want to take their distribution fully. In order to avoid this fee, the individual would have to wait two years from the date of the first contribution. Also, if the individual is under the age of 59, they will be charged an additional 10% on top of the original 25%.
All eligible small business employers may establish a SIMPLE plan for their employers. The employer must have no more than one hundred employees. If an employer has already established this plan and the employee numbers exceed one hundred, the SIMPLE plan may continue to be eligible for two additional years. The SIMPLE IRA is ideally suited for a small business owner.