When you have a small business, you may want to attract employees with a retirement plan that allows them to save and invest for the long term. Big companies can fund lavish 401(k) plans, but for some small businesses, that option is too complicated. There's paperwork, expenses, etc. What's the little guy to do? Fortunately there are retirement plan options for small- and even solo-business owners. One of them is the SIMPLE IRA.
SIMPLE stands for savings incentive match for employees. Whether you think it's simple depends on what you are looking for in a retirement plan. Learn more about SIMPLE IRAs, to figure out if they are right for you.
To find information for other tax years, see:
2013 SIMPLE IRA Contribution Limits
Individuals with a SIMPLE IRA can generally contribute up $12,000 in 2013. Depending on your plan, however, those limits could be lower. There is also an additional catch-up contribution offered for individuals age 50 or older. The catch-up contribution limit for 2013 is $2,500. Contact your employer to confirm whether a catch-up contribution is possible. You can contribute to other retirement plans in the same year you contribute to a SIMPLE IRA, but you face a combined maximum limit for all plans is $17,500. Incidentally, $17,500 is the contribution maximum for 401(k) plans in 2013, with an additional a catch up contribution of $5,500.
You have until tax time 2014 to fund your SIMPLE IRA For 2013. If you are filing your taxes in 2013, take a look at the 2012 contribution limits.
How Does a SIMPLE Compare to Other Plans?
A SIMPLE IRA is in many ways like a typical 401(k) plan or similar retirement plan. The money you contribute goes in pre-tax—or, if you are the business owner, you may deduct contributions from your taxable income when you file taxes. Contributions can be invested in mutual funds, stocks and/or bonds, depending on the offerings in your plan. You choose where you want the money to go. Investments accumulate on a tax-deferred basis, which means that no taxes are taken out until you withdraw the money. If you withdraw the money after age 59 1/2, you pay income taxes on your withdrawals. If you withdraw the money before retirement age, you will pay any taxes plus a 10% penalty fee.
A SIMPLE IRA works differently in a few ways. First, there's a built in employer matching incentive. In a typical 401(k) these days, an employer match is a great perk. If you have a SIMPLE IRA, your contributions must be matched by an employer up to 3% of salary. Even if you don't make contributions, your employer can make a flat contribution on your behalf of 2% of salary.
Another big difference is the way SIMPLE IRA rollovers work. A rollover is when you move the funds from one tax-deferred retirement plan to a Rollover IRA without penalty after you leave a job. You can do that if you've been participating in your SIMPLE IRA for less than two years. If you leave your job before being invest in a SIMPLE IRA for more than two years, you must roll it into another SIMPLE IRA, or leave it where it is.
Many of the quirks of a SIMPLE IRA may seem like drawbacks to a small business owner looking for the right retirement plan for herself or employees. If you want to match contributions, it is definitely a plan to consider.
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