What Is A Simple IRA?

by David

investments, jobs

A Savings Incentive Match Plan for Employees (otherwise known as a Simple IRA) is a qualified retirement savings plan. Simply put, this is a way to save for retirement while helping to limit you taxable burden to the IRS.

A Simple IRA is limited to businesses with 100 or fewer employees. Contributions are not subject to discrimination testing, as they are with the 401(k) and many other qualified retirement plans.

This makes the Simple IRA an attractive option for small business owners who do not want to pay the higher costs and fees associated with a 401(k) because of the reporting requirements.

Contributions to the Simple IRA are made on a pre-tax basis. This means that for every dollar you contribute to your Simple IRA, you lower your taxable income by one dollar.

The maximum you may contribute as an employee to a Simple IRA is $10,500 for the 2007 tax year.

If you are self-employed you may make contributions as both the employee and employer. However, if you have employees you must match them at the same percentage.

Your investment inside your Simple IRA will grow tax deferred. However, when withdrawals are taken, they will count as taxable income in the tax year they are withdrawn.

A simple IRA is a retirement savings vehicle, and as such if any withdrawals made prior to age 59-1/2 may be subject to a 10% IRS penalty. Withdrawals will be taxed as income in the year they are taken.

Unlike the 401(k) which usually has a limited number of investments, the Simple IRA allows for almost unlimited investment choices.

The Simple IRA allows you to use the entire array of mutual funds out in the open market, as opposed to only having a choice of 15-20 mutual funds — which is the case with a 401(k) plan.

As previously mentioned, the Simple IRA is a favorite among small business owners who have a small number of employees. For example, a pediatrician with an office of 8 employees will likely have a Simple IRA rather than a 401(k).

The main reason for this is cost. The Simple IRA does not have the same reporting requirements as the 401(k), and therefore has a much lower cost to administer.