SIMPLE IRA

Retirement saving for small business

The SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a written agreement between an employer and employees that creates a simplified plan for contributing towards workers' retirements. Only companies with less than 100 employees who earn $5,000 or more annually can set up this type of plan. It should be the only plan that the employer contributes to. Although contribution levels are similar, unlike the 401k, SIMPLEs don't send the IRS an annual report.

The maximum contribution an employee can make to a SIMPLE IRA in 2007 is $10,500. Workers over 50 can make an additional $2,500 in catch-up contributions. These contributions vest immediately, which means employees can take the money with them as soon as they leave the company. Employers can either make a two percent non-elective contribution where every eligible employee receives it or match employee contributions up to three percent of their annual pay.

Why should an employer offer a SIMPLE IRA?

Eighty percent of large companies have some sort of retirement plan, compared to 25 percent of small ones. This makes the recruiting efforts of small businesses more difficult if they don't have a plan to offer employees. People today realize that they need to provide for their own retirements and will make job choices based on the benefit and retirement plans in place with prospective employers. While a 401k may be too complicated or expensive to establish for many companies, the SIMPLE IRA is something all small businesses should consider. Employers can easily set up a plan with mutual fund companies such as Fidelity that will take care of all the details. Further, administration expenses up to $1,000 in the first three years are eligible for a 50 percent tax credit.

In addition to the SIMPLE IRA, there are a couple of other possibilities for small-business owners. The first is the SEP-IRA, or simplified employee pension plan. This is for self-employed people or for employees of self-employed people. It's only for the smallest of businesses. Here, the employer can contribute a maximum of $44,000 annually or 25 percent of the employee's compensation, whichever is less. The contribution is tax-deductible to the employer and can vary from year to year based on profitability. Any self-employed entrepreneur with a few employees might consider this retirement vehicle because of its cost and simplicity compared to other plans.

For those self-employed people with zero employees, the Solo 401k might make sense. More complicated in terms of paperwork and somewhat difficult to find administrators for the plan, it nonetheless provides higher contribution levels than the SEP-IRA. The Solo 401k has a tax-deductible salary deferral of $15,000, raising the maximum to $59,000 in annual contributions.

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