The SIMPLE Way to Save For Retirement
The SIMPLE Way to Save For Retirement
A relative newcomer to the retirement plan market, the SIMPLE
IRA can be a cost-effective retirement planning alternative for
small employers and their employees.
A SIMPLE IRA plan consists of a deferral program for eligible
employees, along with mandatory contributions by employers. An
eligible employer is defined as an employer who has no more than
100 employees that received at least $5,000 in compensation from
the employer in the preceding calendar year. An employer
maintaining a SIMPLE plan may not maintain any other qualified
retirement plan in which employees currently receive benefits.
What makes the SIMPLE IRA so attractive to business owners is
their ability to defer the maximum ($10,000 for 2006) without
regard to employee participation. There is no ADP test, which
limits how much an employer may defer based on average deferrals
of non-highly compensated employees. Also, there is no top heavy
testing which in other plans requires contributions to all
eligible employees when the plan is deemed top heavy.
Employees are eligible to make deferrals if they receive at
least $5,000 in compensation from their employer during any two
preceding years and they are reasonably expected to receive at
least $5,000 in compensation for the current year. Participants
can defer up to $10,000 for 2006 with no set maximum percentage
of compensation and elect to defer a specified percentage of
compensation as opposed to a dollar amount. In addition, for tax
year 2006, individuals born prior to 1955 will be allowed to
contribute an additional $2,500.
There is a trade off for allowing flexible deferrals. The
employer is required to make a fully vested contribution by
either:
* Matching elective deferrals dollar-for-dollar up to three
percent or * Contributing two-percent of compensation to all
eligible employees, regardless of elective salary deferral
(limited to the current compensation cap for the year - $220,000
for 2006).
Employees are allowed to terminate deferrals at any time during
the year and depending on the plan provisions, may or may not be
able to re-initiate deferrals again that same year.
Be mindful that participants who take withdrawals from a SIMPLE
IRA prior to age 59