A Simple IRA Might Outlast The Current Stock Market SlumpEven though the current economy is being described as the worst since the Great Depression, employers still recognize that offering retirement plans such as a simple IRA is one of the best things to do for its employees. What goes down must come back up. At some point, the market will regain its strength and people will be able to save considerable amounts for their retirement. When this happens, the employer with a simple IRA will have the most to offer its employees. What is a Simple IRA? SIMPLE stands for Savings Incentive Match Plan for Employees. A simple IRA is a retirement plan for employers that have 100 employees or less. Self-employed individuals may also open a simple IRA account. Contributions to the plan are made on a tax-deferred basis. Unlike a traditional 401k retirement plan which requires employees to be at least 21 years old, the simple IRA does not have an age requirement. However, employers may have other requirements in order for an employee to participate. For example, most plans require that the employee has made at least $5,000 during the two preceding years prior to the plan initiation. There are a few exceptions for which employees are required to be covered. If employees are covered by a collective bargaining agreement which includes retirement benefits, an employer does not have to provide a simple IRA account for those employees. Additionally, employers are not required to cover nonresident aliens. Contribution Requirements for a Simple IRA There are different contribution formulas which an employer may choose when setting up a simple IRA account. Employers can make a 2% non-elective contribution to the account on behalf of each employee. This percentage must equal 2% of their total compensation even if the employee chooses not to make a contribution. If the employer decides to have a dollar-for-dollar match of up to 3%, only the employees who choose to make a contribution will receive the employer contribution. Distribution Rules Contributions made to a simple IRA are tax-deferred. Money distributed from the account is taxable for the year it was received. Individuals who make a withdrawal before age 59 ½ are required to pay an additional 10% tax. This tax is increased to 25% if the withdrawal occurs within the first two years of participation.
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