A SIMPLE (Savings Incentive Match Plan for Employees) IRA plan offers great advantages for businesses that meet two basic criteria. First, your business must have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year). In addition, you cannot currently have another retirement plan. If you are among the thousands of business owners eligible for a SIMPLE IRA plan, read on to learn more.
A SIMPLE IRA plan provides you and your employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. Compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs – they are just simpler to operate.
Other advantages of a SIMPLE IRA plan:
- SIMPLE IRA plans are easy to set up and run – your financial institution handles most of the details
- Employees can contribute, on a tax-deferred basis, through convenient payroll deductions
- You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay
- You may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan. (IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs)
- Administrative costs are low
- You are not required to file annual financial reports
Operating the plan
A SIMPLE IRA plan is true to its name when it comes to plan operations: contributions under the plan (employees’ and yours) are simply deposited into IRAs. These IRA’s can be invested in a wide range of investment products, with mutual funds being the most popular.
Employee contributions
Employee can make salary reduction contributions in any amount to a SIMPLE IRA plan up to the legal limits. The maximum amount that an employee can contribute is $12,000 in 2014. Additional employee contributions, known as catch – up contributions, are allowed for employees age 50 or over. The additional contribution limit is $2,500 in 2014.
Employer contributions
You have two choices in determining your contributions to the SIMPLE IRA plan:
- A 2 percent non-elective employer contribution, where employees eligible to participate receive an employer contribution equal to 2 percent of their compensation (limited to $260,000 for 2014) regardless of whether they make their own contributions
- A dollar-for-dollar match up to 3 percent of compensation, where only the participating employees who have elected to make contributions will receive an employer matching contribution
An independent investment advisor is an excellent place to start to determine whether a SIMPLE IRA would be a good fit for your organization. Your employees and their families will appreciate your forward thinking and you’ll reap the benefits of both saving and keeping your valuable employees around for years to come.
Mark S. Martel, CFP, is a local independent investment advisor and principal with Martel Wealth Advisors Inc. He can be reached at 360.694.9940. Securities and advisory services offered through KMS Financial Services Inc.
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