What is a SIMPLE Savings Plan?

These days, it’s easier than ever for small business owners and self-employed individuals alike to have options for retirement accounts, and a savings incentive match plan for employees (SIMPLE) is just one such option. This particular plan is just as great for employees as it is employers for its ease of use and account management.

Small business may have up to 100 employees to qualify for a SIMPLE plan, but those employees have to have been paid at least $5,000 during the last tax year and cannot currently have any other type of retirement plan. This type of retirement account can be set up the same as a standard IRA or a 401(k) plan.

Members of the workforce who qualify are able to make pre-tax annual contributions or offer up all their salaries up to a limit of $12,500. If an employee is at least 50 years old during a specific tax year, she or he has the option of a $3,000 contribution to catch-up. All employees have the option of making Roth contributions. Employers, or whoever is in charge of SIMPLE account administration, have to make equal contributions that total the same as those made by employees. That, or they can make non-elective contributions at a two percent rate for every employee.

In regards to withdrawal taxes, they’re the same as those applied to standard income. And just like with a standard IRA plan, account holders face a 10 percent federal income tax fee if they make a withdrawal from their SIMPLE account before reaching the age of 59 and a half if specific exceptions do not apply to them. In most cases, employees have to start and maintain regular distributions once they are 70 and a half.

Something else worth pointing out with these plans is there is a waiting period of two years after the date of plan enrollment before the account holder is able to shift her or his SIMPLE contributions to another IRA. Anyone who dips into an account within the first two years of setup faces a 25 percent tax penalty as well as standard income taxes. After that two years, the early withdrawal penalty drops to the regular 10 percent.

Now small business owners have another incentive for enticing qualified employees and helping them meet their retirement goals. Those who are self-employed also have another option for enjoying the perks common to traditional employment.