If you are a small business owner and are looking to have a retirement plan, a SIMPLE IRA is a great option. Act quick though, tomorrow, October 1, is the deadline for opening a new plan for the year. There are lots of advantages of the SIMPLE IRA for both you and your employees.
The SIMPLE IRA, aka the Savings Incentive Match Plans for Employees IRA, is in a word, simple, both to set up and to operate. This gives you, as a business owner, the ability to offer a qualified retirement plan to your employees for little hassle and modest contributions. Note that this plan is only available to businesses with less than 100 employees who earned at least $5,000 compensation during the last year.
If you’ve ever contributed to a 401(k) plan, you basically know how the SIMPLE plan works. Your employees contribute to the plan (up to $12,000 or $14,500 if you are 50+ years old for 2013) and you make contributions for each eligible employee in one of two ways. First, you may choose a dollar for dollar matching contribution up to 3% of each employees’ compensation. For example, an employee who earns $50,000 and contributes $5,000 will receive $1,500 from you. If you are having a down year, you may contribute less than 3%, but may only do that twice within five years. The other option is a non-elective contribution of 2% (no matter if the employee contributes to the plan or not). That same $50,000 employee who makes no contribution would receive $1,000 from you in this example.
SIMPLE IRAs offer many advantages over other qualified plans. There’s no annual reporting to the government if you use a SIMPLE IRA. It’s also much easier to budget with this plan. If you choose the non-elective contribution, you know your contributions will be 2% of your employees’ payroll. It may be smaller with the 3% option since you don’t contribute to employees who don’t contribute to the plan. You have no fiduciary exposure since employees manage their own investments. Further, you can choose a plan that allows the employees to choose his or her own financial institutions.
The major drawback is that you cannot contribute as much as you can to other qualified plans like a 401(k) or SEP IRA. As mentioned, you must set up the plan by October 1 for the current year. If you have the plan previously, to use one for the current year must be done by January 1 for that year.
A SIMPLE plan is just one great option for small business owners who want to set up a retirement account for their employees. You might look into a SEP IRA as well. You have until October 15 to set one of those up for your business for the current year. If you have any questions or are looking to set up a plan for your small business, contact one of the tax experts at the IRA Financial Group @ 800.472.0646 now!