SIMPLE
If you’re looking for higher contribution limits than a Traditional or Roth IRA, establishing a SIMPLE (or a Simple IRA) might be your best option. A SIMPLE is an ideal retirement plan for sole-proprietors and small business owners with 100 or fewer employees who have no other qualified plans; and pay themselves less than $45,000 and want to enjoy higher contribution limits.
With a SIMPLE plan, contributions are tax deductible, and earnings within the account are tax free until withdrawal.
Contribution Limits
A SIMPLE allows employee contributions of up to $11,500 in 2009 if you're under age 50, and up to $14,000 if you're 50 or older; and as an employer you are generally required to match each employee's salary reduction contributions, on a dollar-for-dollar basis (100%), up to 3% of the employee's compensation (this may be reduced to 1% in 2 of any 5 years).
A maximum of $23,000 combined employer and employer contribution is permitted if your under age 50.
Advantages of a SIMPLE
- A SIMPLE is easy to establish and maintain.
- There are no annual 5500 filing requirements.
- Contributions are deductible to the employer.
- No discrimination testing.
- Not subject to top heavy testing rules.
Disadvantages of a SIMPLE
- Maximum contribution significantly less than SEP or Individual k.
- Loans are not permitted.
- Plan must be typically established by October 1st for existing businesses.
- Deferrals not permitted until the plan is established.
Eligibility
Corporations, Subchapter S, partnerships, sole proprietorships and non-profit entities can establish a SIMPLE if you have 100 or fewer employees who received $5000 or more in compensation from you for the preceding year; and you do not maintain another qualified—unless the other plan is for collective bargaining employees. Eligible employees must meet ALL of these requirements:
- Be at least 21 years of age.
- Have a year of service (typically 1000 hours per year).
If you are setting up a new plan for an existing business, it must be established between January 1st and October 1st. If you established a new business after September 30th, the plan must be established as soon as feasibly possible but prior to December 31st. Employee deferral contributions are not permitted until the plan is established.
Distributions
- 59 ½ - 70 ½ - No tax penalty
- Over 70 ½ - Distributions must begin by April 1 of the year following the year the individual reaches age 70 ½; and for subsequent years, distributions must be taken by December 31st.
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