Understanding the SIMPLE IRA Rule

It's important to know the SIMPLE IRA rule before you make an investment, to ensure you're making the best possible choice for your retirement plan.

The word "simple" does not mean what you'd think it implies. Simple is the word meaning Savings Incentive Match Plan for Employees. SIMPLE IRA is an agreement in writing that gives a way for employees and employers to contribute to their retirement income.

If an employee is interested in a SIMPLE IRA, they can choose to may contributions from their salary to go towards a retirement plan. The employer will usually match the employee's dollar amount. For instance, if the employee contributes 5% (or $3,000) of their income into the SIMPLE IRA, the employer will also donate $3,000 into the employee's SIMPLE IRA, giving the employee a total of $6,000.

The SIMPLE IRA rule has many different benefits to make it attractive to employers as well as employees. It's an attractive enough retirement plan to help you get and retain good and valuable employees. Employers do not have the headache at the end of the year requiring them to submit an annual government report. Both the employer and employee share in the funding of the SIMPLE IRA. It's also very easy to start up and administer to their staff.

With economy the way it is today, retirement is uppermost in many people's minds. Retirement plans are always one of the first things prospective employees look for when they consider taking a job with a company. When they're told the company offers a SIMPLE IRA, this is definitely a bonus benefit.

Another benefit for the employer is that they are allowed to deduct the amount they contribute to their employees at tax time. Employees love this plan because they are able to save even more towards their retirement than they could with a regular IRA. Any contributions the employee makes are on a pretax basis. What this means is, for example, an employee earns $2,000 and has 10% of this taken out of their paycheck. When the employee gets their paycheck, they will have $200 taken out of their check to go towards their SIMPLE IRA. When income taxes are then taken out of the check, they are taken out of the remaining $1,800 rather than the $2,000 gross earnings. At the end of the year, this amount really adds up. The amount that is contributed into the SIMPLE IRA is tax-deferred until the money is withdrawn from the IRA.

Certain eligibility requirements exist to participate in a SIMPLE IRA. Employers cannot have another qualified retirement plan, such as SEP, 403(b) or similar at the same time. Employees can choose to defer part or all of their salary. They can contribute $10,000 if they so choose. Employers can choose to match the first 3% of the amount contributed by the employee or they can make a non-elective 2% contribution.

SIMPLE IRAs must be started by October 1 to be eligible for that year. If you're interested, you can ask your employer or accountant to explain each SIMPLE IRA rule that may apply to you.