SIMPLE IRAs
Fidelity Investments
The SIMPLE-IRA Plan was designed to make it easier for small businesses
to offer a tax-advantaged, company-sponsored retirement plan. The SIMPLE
plan is a flexible, easy to administer retirement plan for businesses with
100 or fewer employees. SIMPLE plans are funded by employer contributions
and can be funded by elective employee salary deferrals.
| Below are seven key things small
business owners should know about the features of a
SIMPLE-IRA: |
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Broad eligibility requirements
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| Which employers can establish a
SIMPLE-IRA plan? |
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| Generally, any small business that
employs 100 or fewer employees who earned at least $5,000 in the
preceding year can establish a SIMPLE-IRA plan, provided the
employer does not concurrently maintain any other
employer-sponsored retirement plan. Once you know that your
company can establish a SIMPLE-IRA plan, you need to determine
employee eligibility. |
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| Which employees can contribute to a
SIMPLE-IRA plan? |
| The eligibility rules for employee
participation are slightly different than the rules determining
company eligibility. Generally, eligible employees include those
who: |
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have earned at least $5,000
in compensation from the employer in any two preceding years
(whether or not consecutive), and |
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are reasonably expected to
earn $5,000 during the current year |
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| While employers cannot make these
eligibility requirements more restrictive, they can generally
liberalize them to include more employees. |
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| Significant tax advantages |
| Contributing to a SIMPLE-IRA plan can
help small business owners save on their business taxes as well as
their personal income taxes. |
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| As an employer,
you can generally deduct any contributions you make on behalf of
your plan participants from your business expenses. |
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| A special non-refundable tax credit for
50% of certain plan expenses up to a maximum of $500 a year for
the first three plan years may be available. |
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| As a participant,
you and any eligible employees can elect to defer part of your
salary and direct that money into an individual SIMPLE-IRA.
Because these contributions are deferred before certain taxes are
withheld, they actually reduce contributing participant’s
current taxable income. |
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| A non-refundable tax credit may be
available to individuals who make pre-tax contributions to a
SIMPLE-IRA. The credit applies to $2,000 in contributions. There
are certain eligibility requirements that must be met and the rate
of credit depends on the individuals adjusted gross-income. |
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| Any earnings within a SIMPLE-IRA enjoy
tax-deferred growth until withdrawn. When earnings aren't eroded
by taxes each year, they can compound faster. |
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| Flexible
contribution requirements |
Employee
contributions – Eligible employees can elect to
contribute up to 100% of compensation up to a maximum of $10,000
for the 2006 plan year and $10,500 for 2007 through salary reduction. (The amount
elected by the employee may be expressed as a percentage of
compensation or as a specific dollar amount.) |
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| Additionally, participants age 50 and
older in 2006 or 2007 may be able to make an additional annual $2,500
catch-up elective deferral contribution to their SIMPLE-IRA. |
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| Employer
contributions – Employers can choose from two different
contribution methods – and can even switch between these options
each year, provided certain notification requirements are met: |
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– requires employer to match each
participant's contributions dollar-for-dollar – up to 3% of
compensation but no more than $10,000 for the 2006 plan year or
$10,500 for 2007. Also
allows the employer to reduce the employer's match to as little as
1% of each participant's compensation for any two years in a
five-year period. |
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– requires employer to
contribute 2% of each eligible employee’s compensation each year -
up to a maximum of $4,400 for the 2006 plan year or $4,500 for 2007, regardless of
whether the participant contributes or not (the maximum annual
compensation on which contributions can be based is $220,000 for
2006 and $225,000 for 2007). |
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| Self-directed investments |
| A SIMPLE-IRA Plan offers
access to a broad array of investment options, including: |
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Mutual funds. |
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Individual stocks and bonds |
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CDs and U.S. Treasuries |
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| You and your employees can enjoy
discounted commissions when you trade stocks and options in your
SIMPLE-IRA through the Brokerage package. |
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| Each SIMPLE-IRA participant has a
separate account and may generally direct his or her own
investments within the account. |
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| Access to assets |
| Like a Traditional IRA, a SIMPLE-IRA
plan does allow participants to withdraw their money at any time.
However, to encourage long term saving for retirement,
distributions from a SIMPLE-IRA in the first two years of
participation are subject to a higher early withdrawal penalty
than nonqualified distributions made from Traditional IRAs or Roth
IRAs. |
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| If your participants are under age 59½: |
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Withdrawals taken within
the first two years of plan participation will generally be
subject to a 25% early withdrawal penalty1 |
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Withdrawals taken after the
first two years will generally be subject to a 10% early
withdrawal penalty2 |
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1 Withdrawals taken within the
first two years of plan participation are not permitted for
purposes of conversion to a Roth IRA or rollover by transfer to an
IRA other than a SIMPLE-IRA.
2 These early withdrawal penalties
do not apply to those participants who have attained age 59½ or
are taking distributions for death, disability, substantially
equal periodic payments, medical expenses in excess of 7.5% of
AGI, health insurance premiums by certain unemployed individuals,
first-time home purchases, qualified higher education expenses, or
on account of an IRS levy.
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| Low cost and minimum administrative
requirements |
| Two key advantages for an employer to
establish a SIMPLE-IRA plan are that it is cost-effective
to establish and easy to maintain. |
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No special plan-level tax
reporting is required for the employer each year |
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No discrimination testing
required |
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No need to track vesting,
since all contributions are immediately 100% vested (which means
each employee owns all of the assets in his or her SIMPLE-IRA
immediately and can take these assets with them if leaving the
company.) |
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Establishment deadlines
For employers who want to
establish a SIMPLE-IRA plan for the current tax year, you must set
up the plan and notify your employees by October 1 of the current
tax year. (An exception applies for businesses which are
established after October 1.) |
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