From
Your Perspective:
Small business retirement plans
SIMPLE IRAs
Short for the Savings Incentive Match Plan for Employees of Small Employers, the
SIMPLE IRA
is as easy as an
SEP IRA
to set up and maintain. However, the SIMPLE may be set up as a
salary reduction plan
designed to accept employee contributions, although it also requires a
company contribution. If you have fewer than 100 employees and have no
other business retirement plan in place, you can use a SIMPLE. The
employee contribution limit for 2008 — $10,500 plus a $2,500 catch-up
contribution if you’re 50 or older — is lower than with other plans, so
it may be less suitable if you’re a sole owner, self-employed, or the
only employee. It also has stricter rollover and early withdrawal rules.
How the SIMPLE IRA works
With a SIMPLE IRA, all eligible employees must be included and, as with other IRAs, they are immediately
vested
in the total value of their account. The company must make a
matching contribution,
dollar-for-dollar up to 3% of the amount an employee defers into the
plan. If your employees don’t defer any salary, your business still has
to contribute at least 2% of their compensation. That requirement,
combined with the lower contribution level, may make other plans more
appealing even if few of them are simpler.
A SIMPLE account must be open at least two years before you can take the money out or move it anywhere except another SIMPLE plan — or you’ll owe a 25% penalty. That’s a lot steeper than the usual 10% early withdrawal charge that you’d pay with a traditional plan.
