SIMPLE IRA

If you own a business or perhaps have a home-based business, you may be interested in the SIMPLE IRA. What is it? Here is a basic review of the Savings Incentive Match Plan or individual retirement account plan.

Let’s assume you own a small business with five or six employees. You can establish a SIMPLE IRA wherein employees contribute a pre-tax dollar amount to the plan. The tax is then deferred until a later time when it is actually distributed. As an employer, there is a choice on what type of contribution is made based on two categories: one is called a matching contribution which falls under the elective deferral and the other is called the non-elective contribution which falls under the salary-deduction contribution.

In the case of the matching contribution, as an employer you would match whatever the employee contributes to the plan. If you choose non-elective contributions, then you are required to contribute to the plan even if the employees do not contribute. As the employer, you are then given a tax deduction for all contributions made to the individual retirement account plan. As with other IRA plans available today, no tax is deducted from an employee’s contribution unless and until distributions are made.

Who can become part of a SIMPLE IRA plan? If you own a small business that employs no more than 100 employees whose salary is a minimum of $5,000, you are then eligible to establish this IRA. Conversely, any employee who made a minimum salary of $5,000 in any 2-year period can participate in the plan as well.

How does an employer set up the SIMPLE IRA? Obtaining a 5304-SIMPLE form from the IRS and filling out all of the sections is required. This form also allows the business owner to let each employee choose which bank he or she prefers in setting up the IRA account. Form 5305-SIMPLE, on the other hand, is for business owners who rather choose the bank wherein all of the employees will make their contributions.

It should be noted that not all SIMPLE IRAs have to be made with a bank. There are mutual funds, real estate, stocks, bonds, and money market funds in which one can invest. However, with today’s economy in a state of flux and the stock market reacting daily events, it may be appropriate to seek advice as to where one can open an IRA that is safe and will offer a successful return.

For more information on SIMPLE IRA, you can talk with your accountant, banker, or the company in which you may already have a portfolio. In either case, research all of the aforementioned investments to ascertain which will be the best for you and your employees.