SIMPLE IRA

Introduction
The SIMPLE (Savings Incentive Match Plan for Employees) IRA was established in 1996 by the Small Business Job Protection Act. At year end 2007, SIMPLE IRAs held approximately $61 billion dollars of assets.[see:ICI The U.S. Retirement Market, 2007 (July, 2008)

Requirements for establishing a SIMPLE IRA include:
 * Small-business owners (including sole proprietors, partners, and owners of S- or C-corporations) who do not have an existing retirement plan.
 * Employers with 100 or fewer employees.
 * Generally, employers who maintain a SIMPLE IRA cannot contribute to any other employer-sponsored retirement plan.

Contributions to a SIMPLE IRA can be made by:
 * Employers may make matching or nonelective contributions to an employee's account.
 * Matching. If you offer matching contributions, only employees who elect to make their own salary deferral will receive an employer contribution. Employers must match the employee contribution dollar for dollar up to 3% of each eligible employee's compensation. Employers may select a limit lower than 3% of compensation (between 1% and 3%), but only in two years out of any five-year period.
 * Nonelective. If you offer nonelective contributions, each eligible employee must receive a contribution totaling 2% of compensation (up to $4,500 for 2007 and $4,600 for 2008), even if the employee chooses not to make any contributions. An employee's maximum compensation that can be included for calculating the nonmatching contribution is $225,000 for 2007 and $230,000 for 2008.
 * In general, all employees who receive at least $5,000 in compensation for the current calendar year and who received at least $5,000 during any two previous years are eligible.
 * Employees covered under collective bargaining agreements for which retirement benefits were the subject of good-faith bargaining can be excluded.
 * Nonresident aliens with no U.S.-source income can be excluded.
 * If you choose matching contributions, you must match each employee's contribution up to 3% of eligible compensation. If you choose nonelective contributions, you must contribute 2% of eligible compensation for each eligible employee, even if the employee chooses not to contribute., [source Vanguard]

SIMPLE IRAs may be one of two type plans:
 * IRS Form 5304-SIMPLE: this form of SIMPLE IRA permits each employee to choose the financial institution for receiving contributions. The employer is required to send contributions on behalf of the employee directly to the financial institution of the employee's choice. Most participants are unaware of this option, so the employee should check with the employer to see what form was used to create the plan.


 * IRS Form 5305-SIMPLE: this form of SIMPLE IRA requires all contributions to be deposited initially at a designated financial institution of the employer's choosing. An employee must execute trustee-to-trustee transfers in order to invest with a fiduciary of choice. During the first two years of SIMPLE IRA participation, a transfer can only be made to another SIMPLE IRA. After two years (dated from the first contribution into the plan) transfers can be made into a Traditional IRA. Using a Trustee-to-Trustee transfer does not affect annual contribution limits to personal IRA accounts.

Taxation
SIMPLE IRA salary contributions are made with pre-tax dollars. Earnings are tax deferred until distributed, at which time they are taxed as ordinary income. A withdrawal during the first two years of a plan's existence are accessed a 25% penalty tax. After two years, an early withdrawal incurs a 10% penalty tax. Withdrawals are not subject to penalty tax when made after age 59 1/2; and minimum withdrawals must begin once an account owner turns 70 1/2.

Contributions
Employees can contribute up to 100% of earned income to the following limits.

Links

 * IRS SIMPLE IRA Plan
 * IRS Publication 590 Individual Retirement Arrangements (IRAs)