The purpose of an IRA or an Individual Retirement Account is to provide for retirement. Most people are aware of the employer sponsored 401(k) retirement plan. The SIMPLE IRA plan is meant for small employers who do not sponsor any other retirement plan. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is established by employers managing a workforce of 100 employees or less. It has lower contribution limits and less administrative requirements as compared to other plans. It places the onus of providing for the employee's retirement on the employer, since the employer must contribute irrespective of whether the employee contributes. Setting it up is easy and hassle free, because filling out a couple of forms is all it takes. Although it is meant for small business undertakings, with the number of employees not exceeding 100, a small company that is in the growth phase, may establish this plan, provided within a span of 2 years the company reduces the sustainable workforce to 100 or less. It can also be established by self employed people.
Contributions to a SIMPLE IRA
Employee Contribution: It allows the employees to contribute a portion of their pretax salary. He may also choose not to contribute to the retirement plan. His pretax salary contributions are known as salary deferrals or salary reduction contributions and he owns 100 percent of all the contributions that are made to the plan.
Employer Contribution: As mentioned earlier, the employer must contribute regardless of whether the employee contributes. Inflexible employer contributions allow no room for discrimination. The employer receives a tax deduction for the contributions made to the plan. The employer can contribute in following manner:
Non-Elective Contribution: When the contribution made by the employer is independent of the employee's contribution, it is known as a non-elective contribution. Under this scheme, the employer contributes 2 percent of the employee's salary regardless of whether the employee contributes.
Matching Contribution: When the contributions are based on the employee's contributions, it is referred to as a matching contribution. In this case, the employer is expected to contribute a dollar for every dollar contributed by the employee not exceeding 3 percent of the employee's salary.
SIMPLE IRA Contribution Limits for Employees
The following table gives us an idea about the contribution limits, over the years. For the year 2013 and 2014, the maximum allowable contribution is $12,000. An additional contribution is allowed for employees of ages 50 and over. This is known as the catch-up contribution. The catch-up contribution limit for 2013 and 2014 is $2500.
|Tax Year||Contribution Limit||Catch-up Contribution Limit|
Employer contributions are made in accordance with the aforementioned rules with one notable exception. The employer can choose to reduce matching contributions from 3% to a minimum of 1% for 2 out of 5 years. Hence, the table has been given for a 5-year period.
Since the purpose of this plan is to provide for the employee's retirement, withdrawals before the age of 59 ½ but after 2 years of participating in the plan are subject to a 10 percent additional tax. While withdrawals made within 2 years of participation are subject to a 25 percent additional tax. Again, loans from the SIMPLE IRA are not permitted.