Simple IRA Plan

There are several retirement plan options available for individuals and businesses. There are two types of simple plans, Simple IRA and Simple 401(K). This article will concentrate on the simple plan IRA. The simple 401(K) plan will be discussed in a later article. There are two types of individual retirement arrangements, the traditional and the Roth. These two types were addressed in a prior article. A prior post also discussed simplified employee pensions ( SEP ).

The simple plan IRA is a savings incentive match plan for employees IRA and generally, must meet the same requirements that apply to traditional IRA's. An employer is eligible to start a simple plan IRA if the employer has one hundred ( 100 ) or fewer employees who received at least five thousand dollars ( $5,000 ) in compensation in the preceding tax year. Generally, the employer can only make contributions to the simple plan, and to no other qualified plan, starting with the tax year the plan goes into effect.

An employee, must be eligible to participant in the plan, when the employer has established a simple plan IRA, if the employee has received at least five thousand ( $5,000 ) dollars in compensation from the employer in one or both of the prior calendar years and is reasonably expected to receive at least five thousand ( $5,000 ) dollars in compensation in the current calendar year. This compensation requirement is the same for self employed individuals. The self employed individual is treated as an employee for the simple plan IRA for eligibility.

Under the simple plan IRA, each eligible employee has the right to elect participation in the plan for that calendar year and the amount of his or her contributions to the plan. The right to make the election is the sixty ( 60 ) day period before the start of the calendar year, or the sixty ( 60 ) day period before the employee's first day of being eligible for the plan.

Employee contributions to the simple plan IRA are made by salary reduction contributions. The employer must make payments to the employee by either cash or as a contribution to the employee's simple account. The employee makes the election how the contributions are to be made by the employer. There is an annual limit of twelve thousand five hundred ( $12,500 ) dollars for the employee's contribution to the simple plan IRA for 2018. Additionally if the employee is at least fifty ( 50 ) years of age by the end of the year, he or she can make an additional contribution of three thousand ( $3,000 ) dollars for that year.

Additional considerations on employee contributions. The employee may contribute to the simple plan IRA after the age of seventy and one half ( 70 ? ) years. Employee contributions to the simple plan IRA are fully vested when made. The employer must deposit the employee contributions to the simple plan IRA within thirty ( 30 ) days after the end of the month in which the employee would have been paid.

Employer contributions to the employee simple plan IRA are made by one of two methods. A matching contribution to the employee contribution of up to three ( 3 ) percent per year of the employee's annual compensation. The employer can elect, no more than two ( 2 ) times out of five ( 5 ) years, to limit the contribution to one ( 1 ) percent instead of three ( 3 ) percent. Or the employer can elect to match the employee's contribution by two ( 2 ) percent of the employee's annual compensation. But this contribution is only for eligible employees who have at least five thousand ( $5,000 ) in compensation in the calendar year. The employer's contributions to the employee's simple plan IRA must be fully vested at all times.

The employer can deduct the contributions made to the employee's simple plan IRA for the calendar year, if the contributions are made by the due date of the return for the tax year, including extensions.

Distributions to the employee from his or her simple plan IRA are taxable to the employee and are governed by the rules for traditional IRA's.

The importance of having adequate retirement savings cannot be emphasized enough. To accomplish this goal, looking into a simple plan IRA is worth the time. It can make the difference between the retirement you look forward too, and one in which you are challenged financially.

The article is general in nature, and not specific to any individual or business, and is the opinion of the writer. It does not intend to provide specific legal or financial advice, rather general information about the subject matter. Individuals considering retirement plans, or simple plan IRA's should consult with their legal and/or financial advisers.

To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.