If you have a SIMPLE IRA, the retirement plan for small businesses with 100 employees or less, you still have time to make contributions for 2012. Take advantage of it, and you may even be able to lower your 2012 income tax bill. Here's what you need to know.
First, What's the Meaning of SIMPLE?
SIMPLE stands for savings incentive match for employees. It's an IRA that works like a 401(k) for small businesses. It can be a cheaper and less complicated alternative to a 401(k) plan.
Like a 401(k) plan, contributions made to SIMPLE IRA plans are pre-tax or tax-deductible. Plus, the invested money in the plan accumulates without taxes being taken out until you retire after age 59 1/2. So contributions you make lower today's taxable income or allows you a deduction, which lowers the amount of taxes you pay. And, at retirement, your income taxes will generally be lower (although this depends on your specific situation, of course). So withdrawals from your IRA should then be taxed at a relatively lower rate. But the tax-deferred growth is the true benefit. When money accumulates without taking a regular tax hit, it makes a big difference. If you pull any money out of an IRA before age 59 1/2, you will pay a 10% penalty fee. Plus any applicable federal, state and local income taxes.
2012 SIMPLE IRA Contribution Limits
In 2012, the SIMPLE IRA contribution limit is generally $11,500. Why "generally"? For a few reasons. First, your plan's limit may be lower than that. Or, if you are age 50 or older, you may be eligible to make an additional catch-up contribution of $2,500 in 2012. (You can confirm your limit and whether a catch-up contribution is offered within your plan by contacting a human resources representative or your plan administrator.) You can have a SIMPLE IRA an another tax-deferred employer-sponsored retirement plan, but there is a limit on how much you can put into all of the plans combined. In 2012 that limit is 17,000. SIMPLE IRA contribution limits for 2013 are slightly higher.
Matching With a SIMPLE IRA
The one thing you need to understand before considering a SIMPLE IRA is its unique employer matching rules.
Matching contributions from an employer are built in to how the SIMPLE IRA works. Employers must either match their employees' SIMPLE IRA contributions up to 3% of salary, or make dollar-for-dollar contributions on behalf of the employee up to 2% of salary. (Compare this to a 401k, where employers have no obligation to match funds.) Employers who don't want to match their employees' salaries should look to a different small business retirement plan.
SIMPLE IRA Contribution Deadlines for 2012
You can make contributions to a 2012 SIMPLE IRA until you file your personal income taxes for the year. That means the tax deadline of April 15, 2013, or later if you file an extension. Beyond that, you can put in contributions in a SIMPLE IRA in 2013. Find out about 2013 SIMPLE IRA contribution limits.
Of course, there are many small business retirement plan options to choose from. So investigate which plan is best for you and your business before making any decisions.
DISCLAIMER: The information included here is not professional financial advice. It is intended for guidance only. Any private (non-governmental) websites linked to from this piece are included for informational purposes and cannot be verified. While we every effort is made to ensure that this information is correct, it may vary depending on your own personal circumstances.