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A SIMPLE (Savings Incentive Match Plan for Employees) IRA is also designed primarily for smaller businesses, again offering an easy way to make a retirement plan available to employees of the organization. With a SIMPLE IRA contributions are made by the employees, with a employers being required to augment the plan.
For employers, a SIMPLE IRA offers the following advantages:
- Contribution limits far exceed those for IRAs
- All employer contributions can be deducted from the company's current earnings
- Like a 401(k) plan, participation and the amount invested is in the hands of employees, and not the responsibility of the employer. Employees simply reduce their current salary by the amount deducted for the SIMPLE IRA.
- There no requirement to file an annual report with the IRS, as there is with a traditional Keogh plan.
Employees can benefit because:
- They can put significant sums toward their retirement
- Although contributions come out of their own paychecks, they are made with pre-tax dollars
- Every dollar invested in the plan in the name of an employee belongs to that person immediately. There is no vesting period.
- Once leaving the employer (provided holding period requirements are met - see below), the money can be rolled directly into an IRA to maintain the tax-deferred benefit.
Contribution limits
In 2002, the contribution limit for SIMPLE IRAs is increased to $7,000 (from $6,500 in 2001). Every employee with earned income of at least that amount can invest as much as they wish, up to that level, in the plan. Employers must contribute either 2% of income for all eligible employees or match up to 3% of participating employees' contributions.
Requirements of a SIMPLE IRA
- All employees who earn at least $5,000 must be eligible for the plan.
- Contributions go into an IRA account set up in the employee's name
- SIMPLE IRAs have stricter rules on transfers and withdrawals than many other plans. An individual's account must be open for at least two years before the money can be moved or withdrawn. If those requirements aren't met, a 25% penalty will be owed on the amount transferred or withdrawn.
Start on your path today
To take a step towards a comfortable retirement, please contact your Protective representative today.
Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide financial, legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.
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