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A SIMPLE IRA plan is a
Savings
Incentive
Match
PLan
for Employees.
Because this is a simplified plan, the
administrative costs should be lower
than for other, more complex plans.
Under a SIMPLE IRA plan, employees and
employers make contributions to
traditional Individual Retirement
Arrangements (IRAs) set up for employees
(including self-employed individuals),
subject to certain limits. It is ideally
suited as a start-up retirement savings
plan for small employers who do not
currently sponsor a retirement plan.
To establish a SIMPLE IRA plan,
you:
-
Have a business with, generally,
100 or fewer employees.
-
Need to complete just a form or
two.
-
Cannot have any other retirement
plan.
Note: Here are some tools to help you
start up your SIMPLE IRA plan.
Advantages:
-
Easy to set up and run – usually
just a phone call to a financial
institution gets things started.
-
Administrative costs are low.
-
Employees can contribute, on a
tax-deferred basis, through
convenient payroll deductions.
-
You can choose either to match
the employee contributions of
those who decide to participate
or to contribute a fixed
percentage of all eligible
employees’ pay.
Under a SIMPLE IRA plan, you, the
employer, make contributions to
traditional IRAs (SIMPLE IRAs) set up
for each of your eligible employees. In
addition, this type of plan allows your
employees to defer a part of their
salaries into the plan for retirement. A
SIMPLE IRA Plan is funded both by
employer and employee contributions.
Each employee is always 100% vested in
(or, has ownership of) all money in his
or her SIMPLE IRA.
How does a SIMPLE IRA plan
work?
Example 1:
Elizabeth works for the Rockland
Quarry Company, a small business with 50
employees. Rockland has decided to
establish a SIMPLE IRA plan for its
employees and will match its employees’
contributions dollar-for-dollar up to 3%
of each employee’s salary. Under this
option, if a Rockland employee does not
contribute to his or her SIMPLE IRA,
then that employee does not receive any
matching employer contribution from
Rockland.
Elizabeth has a yearly salary of
$50,000 and decides to contribute 5% of
her salary to her SIMPLE
IRA. Elizabeth’s yearly contribution is
$2,500 (5% of $50,000). The Rockland
matching contribution is $1,500 (3% of
$50,000). Therefore, the total
contribution to Elizabeth’s SIMPLE IRA
that year is $4,000 (her $2,500
contribution plus the $1,500
contribution from Rockland). The
financial institution partnering with
Rockland on the SIMPLE IRA plan has
several investment choices and Elizabeth
is free to pick and choose which ones
suit her best.
Example 2:
Austin works for the Skidmore Tire
Company, a small business with 75
employees. Skidmore has decided to
establish a SIMPLE IRA plan for all its
employees and will make a 2% nonelective
contribution for each of its
employees. Under this option, even if a
Skidmore employee does not contribute to
his or her SIMPLE IRA, that employee
would still receive an employer
contribution to his or her SIMPLE IRA
equal to 2% of salary.
Austin has a yearly salary of $40,000
and has decided that this year, he
simply cannot make a contribution to his
SIMPLE IRA. Even though Austin does not
make a contribution this year, Skidmore
must make a contribution of $800 (2% of
$40,000). The financial institution
partnering with Skidmore on the SIMPLE
IRA plan has several investment choices
and Austin has the same investment
options as the other plan participants.
A SIMPLE IRA Plan has a life cycle
with four distinct stages. Click on the
below links to review additional
information on each of the life stages
of a SIMPLE IRA Plan:
Information source www.irs.gov
For more information, contact us at 512-462-3704 or
info@bluepacificwealth.com .
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