Simple IRA: A Retirement Savings Option for Employers

Do you really want to tempt fate by not doing something to provide for your own retirement? It really is time to be realistic about Social Security. The likelihood it is going to stand the test of time as it currently operates is highly suspect. The good news is employers can now offer their employees a variety of retirement savings options to help them plan for their retirement.

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Simple IRA FAQs

As the name implies, the Simple IRA is the simplest savings option an employer can select for his organization. This particular IRA options allows employees to contribute up to $13,000 per year in pre-tax dollar into their investment account. Additionally, employees 50 years of age or older are permitted to contribute an additional $3,000 a year until age 59 as part of a “catch-up” provision.

Setting aside contribution limitations, this particular investment/savings option works very much the same way as a 401K plan for the employee. Again, all contributions are made in pre-tax dollars, resulting in immediate tax savings. The investment amount plus any subsequent earnings will accumulate on a tax-deferred basis. The employee will not have to pay taxes until they take distributions at which time they will need to pay taxes on the distribution amounts based on their personal statutory tax rate for the applicable tax year. Any distributions taken prior to age 59 1/5 will also result in a 10% penalty on the early distribution amount.

What about the employer side? From the employer’s perspective, this type of IRA is the most cost-effective option if the employer has 100 employees or less. However, there are restrictions the employer must consider before they commit to this option.

The most important consideration is the way employer contributions are determined. The employer actually has two options: They can match employee contributions up to 3% of the employee’s salaries or they can elect to make a standard non-elective contribution of 2%. If the employer chooses the latter option, they must make that 2% contribution on behalf of all QUALIFIED employees regardless of whether the employee chooses to make contributions on their own behalf or not.

There’s one other very important restriction for the employer to consider. Should they elect to initiate this type of retirement savings plan for their employees, they cannot elect out of making contributions for any reason. That’s vastly different than a 401K plan where the employer can actually change their contribution percentages or completely elect out on a year-by-year basis. On matching contributions, they can adjust the matching contribution percentage each calendar year but never lower than 1% of the employee’s salaries.

As a retirement savings account, employees might want to consider using a diverse selection of investment options. The available options will be determined by where the employer establishes the plan. If it’s with a brokerage firm (and some banks), employees should be able to invest in stocks, bonds, mutual funds and any other available option that qualifies under IRS guidelines.

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