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With pensions going the way of the saber-toothed tiger, many
workers increasingly rely on 401(k) accounts. Not all employers
have the wherewithal to offer such plans, though. If you work for
such an employer, you're not out of luck: You might be able to
save money for retirement with a SIMPLE IRA -- so long as you
follow the SIMPLE IRA rules.
Many people are unfamiliar with the SIMPLE IRA, less commonly
known as the savings incentive match plan for employees
individual retirement account. Most of us have heard of the top
two IRA types, the traditional IRA and the Roth IRA. The
traditional IRA takes pretax contributions, lowering your current
tax bill, and then taxes withdrawals in retirement. The Roth
offers no up-front tax break, but in retirement, you can withdraw
your contributions and earnings tax-free. When you weigh these
options against the SIMPLE IRA, though, you may find that the
SIMPLE IRA rules.
The SIMPLE IRA permits small-businesses owners (and the
self-employed, too) to contribute to retirement savings plans for
their workers and themselves through a simplified system. Workers
get to decide whether they want to make salary-reducing
contributions, and employers must make matching contributions (up
to 3% of the employee's compensation) or nonelective
contributions (contributing a fixed 2% of income to every worker,
whether they make their own contributions or not).
How it works
For starters, know that worker and employer contributions go
into a SIMPLE IRA. The SIMPLE IRA rules
regarding investment, distribution, and rollovers are the
same as those that govern traditional IRAs.
The IRS offers lots of information on
SIMPLE IRA rules
, but here are some key things to know.
For 2014, the contribution limit for the
is $12,000 for most workers, plus an optional catch-up
contribution of $2,500 for those aged 50 or older. That makes it
a more powerful saving tool than a traditional or Roth IRA, which
has a contribution limit of $5,500 plus a catch-up contribution
of $1,000. It gets even better, too. Like a 401(k), the SIMPLE
IRA permits dollar-for-dollar employer contribution matching of
up to 3% of your earnings.
Your contributions, meanwhile, offer tax advantages. They're
deducted from your taxable income, as they are for traditional
IRAs (and 401(k) contributions). Thus they'll reduce your taxes
due in the year of the contribution, and the money can grow
tax-deferred until you withdraw it, ideally in retirement. (At
that time, it will be taxed at your income tax rate.)
Another one of the key SIMPLE IRA rules requires that the
employer have no more than 100 employees and offer no other
retirement plans. Setting up a SIMPLE IRA involves filling out
one or two forms and perhaps making a phone call. There are few
to no filing requirements for the employer -- the financial
institution managing the program takes care of that. Better
still, employers may qualify for a tax credit of up to $500 for
the first three years they offer a SIMPLE IRA in order to offset
SIMPLE IRAs are often set up with
, and once you have money in a SIMPLE IRA account, you typically
have a wide range of investments you can park it in, such as
stocks, bonds, and mutual funds. The options are often wider than
they are in most 401(k) plans.
The IRS offers a
handy guide (link opens PDF)
that reviews the SIMPLE IRA rules, and it's worth checking out.
For example, you'll learn that eligibility is broad, with
employees earning $5,000 per year (and sometimes less) qualifying
for participation. Also, both employee and employer contributions
are immediately vested, meaning that you don't forfeit any of it
should you change jobs.
A glance at the SIMPLE IRA rules shows that this retirement
plan is simpler for small-business owners than a 401(k) plan and
simpler for self-employed people than the SEP IRA (though the
has its own advantages). It's a great way to boost your
retirement nest egg and those of your employees.
Here's another way to be tax-smart: Take advantage of
this little-known tax "loophole"
Recent tax increases have affected nearly every American
taxpayer. But with the right planning, you can take steps to
take control of your taxes and potentially even lower your tax
bill. In our brand-new special report "
The IRS Is Daring You to Make This Investment
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to learn more.
The SIMPLE IRA Rules You Need to Know
originally appeared on Fool.com.
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