SIMPLE IRA

DEFINITION of 'SIMPLE IRA'

A retirement plan that can be used by most small businesses with 100 or fewer employees. SIMPLE stands for “Savings Investment Match Plan for Employees”; IRA stands for “individual retirement account.” Employers can choose to make a mandatory 2% retirement account contribution to all employees or an optional matching contribution of up to 3%. Employees can contribute a maximum of $12,000 annually in 2013; the maximum is increased periodically to account for inflation.

BREAKING DOWN 'SIMPLE IRA'

SIMPLE IRAs have minimal paperwork requirements--just an initial plan document and annual disclosures to employees. The employer establishes the plan through a financial institution that administers it. Startup and maintenance costs are low, and employers get a tax deduction for contributions they make for employees. To be eligible to establish a SIMPLE IRA, the employer must have 100 or fewer employees. To participate in the plan, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude from participation employees who receive benefits through a union. Employers establish the plan using IRS form 5304-SIMPLE, if they want to allow employees to choose the financial institution where they will hold their SIMPLE IRA, or using form 5305-SIMPLE, if the employer wants to choose the financial institution where employees will hold their IRAs. Employees must fill out a SIMPLE IRA adoption agreement to open their accounts. Once the plan is established, employers are required to contribute to it each year unless the plan is terminated. However, employers may change their contribution decision between the 2% mandatory contribution and the 3% matching contribution if they follow IRS rules. A drawback of SIMPLE IRAs is that the business owner can’t save as much for retirement as with other small business retirement plans, such as a SEP or 401(k).

RELATED TERMS
  1. Savings Incentive Match Plan For ...

    A retirement plan that may be established by employers, including ...
  2. Employee Contribution Plan

    A company-sponsored retirement plan where employees may elect ...
  3. Auto Enrollment Plan

    An employer’s decision to sign employees up to have a percentage ...
  4. Corporate Pension Plan

    A formal arrangement between a company and its employees - or ...
  5. 401(a) Plan

    A money-purchase retirement savings plan that is set up by an ...
  6. Matching Contribution

    A type of contribution an employer chooses to make to his or ...
Related Articles
  1. Retirement

    SIMPLE IRA Contribution Limits in 2016

    Learn the SIMPLE IRA contribution limits for 2016, with a brief summary of how the plan works, including eligibility and contribution and distribution rules.
  2. Retirement

    Retirement Planning For The Self-Employed

    Recent studies show that most self-employed Americans are saving little, if anything, for retirement. But making an investment in yourself is worth it.
  3. Retirement

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  4. Retirement

    SEP IRA Limits in 2016

    Discover the SEP IRA limits for 2016. Included is a summary, plans that would be ideal candidates for SEP IRAs, and contribution and distribution rules.
  5. Retirement

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
  6. Retirement

    Deferred Compensation Plans for Small Business Owners

    Find out the best tax-qualified options business owners can use to defer their compensation and accumulate capital for their retirement.
  7. Retirement

    This Is Why Your Employer Should Offer a 401(k)

    Understand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future employees.
  8. Retirement

    How 401(k) Matching Works

    Find out how employer matching of your 401(k) contributions works, including how employer contributions are calculated and annual contribution limits.
  9. Retirement

    401(k) Contribution Limits in 2016

    Find out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
  10. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
RELATED FAQS
  1. How can an entrepreneur save for retirement?

    Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ... Read Answer >>
  2. Are Simple IRA plans subject to ERISA?

    Learn how the Employee Retirement Investment Security Act, or ERISA, guides the administration of Savings Incentive Match ... Read Answer >>
  3. What are the differences between a 401K and an IRA?

    When employers want to give employees a way to save for retirement, they may offer participation in a 401(k), a retirement ... Read Answer >>
  4. What are the contribution limits on a Simple IRA?

    Learn the 2014 contribution limits for investing in a SIMPLE IRA, meant for businesses with 100 or fewer employees to help ... Read Answer >>
  5. What are the differences between a Simple IRA and a Traditional IRA?

    SIMPLE and traditional IRAs are retirement savings vehicles that differ in their early distribution penalties and in who ... Read Answer >>
  6. How does a Simplified Employee Pension (SEP) plan work?

    Learn how small businesses and their employees benefit from a Simplified Employee Pension, or SEP, IRA, and discover how ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center