
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.
Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions. What makes a SIMPLE IRA unique is that the employer is required to make a contribution on the employee's behalf - either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay - regardless of whether the employee contributes to the account.
SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs, and it's cheaper to set up and run a SIMPLE IRA plan than it is to administer many other workplace retirement plans.
Who can contribute to a SIMPLE IRA?
To set up a SIMPLE IRA an employer must have 100 or fewer employees earning more than $5,000 each - including all employees who have worked at any point in the calendar year. And the employer cannot have any other retirement plan besides the SIMPLE IRA.
If your employer offers a SIMPLE IRA, you qualify to contribute if you earned at least $5,000 a year during any two years before the plan was set up, and if you expect to earn at least $5,000 this year.
How much can I put into a SIMPLE IRA?
There are two sets of contribution limits: one for the employee and one for the employer. If you're an employee, you can contribute a percentage of your salary up to a limit of $12,000 for 2013. If you're 50 or older, you can make an additional $2,500 "catch up" contribution.
Your employer must make a contribution every year it maintains the plan. The company can contribute either 2% of your compensation or a dollar-for-dollar matching contribution not to exceed 3% of pay. Your employer must make a contribution even if you choose not to, and all employees must receive the same type of contribution.
Finally, your company can lower the matching contribution to 1% or 2% of total compensation in any two out of five years that the plan is in effect. In the other three years, the company must make either a 3% match or the 2% flat contribution.
How do I know if a SIMPLE IRA is right for me?
If you are a small business owner or a self-employed person and you haven't set up any other type of work-related retirement plan, consider the SIMPLE IRA. Unlike profit-sharing or 401(k) plans, SIMPLE IRAs are easy to set up and easy to administer.
This is especially true if you work alone but aspire to run a bigger business. Adding even one full-time employee to other plans, like a SEP IRA, can be a big hassle. Not so with a SIMPLE IRA. Keep in mind that the SIMPLE IRA's contribution limits are much lower than those for an SEP IRA ($12,000 for the SIMPLE in 2013, versus a maximum of $51,000 for the SEP), which can affect your ability to save enough for a comfortable retirement.