What is a SIMPLE IRA?

The SIMPLE IRA is an employer-sponsored retirement plan in the United States. The name is short for Savings Incentive Match PLan for Employees Individual Retirement Account. Well, the name isn't so simple after all. How about the plan itself?

Like both the 401(k) and 403(b) plans, the SIMPLE IRA is provided and sponsored by the employer on the behalf of the employee. However, when compared to these plans, its administration rules are in general more simple, and less costly. On the other hand, we are talking about finances, taxes, and legal code here, so it's not that simple. Here are some of the basics:

Only an eligible employer may provided a SIMPLE IRA for its employees. An eligible employer must have at most 100 employees, although there is a grace period of two years after passing 100 employees for those companies who already had such a plan in place.

A SIMPLE IRA require minimum contribution amounts from the sponsoring employer. The employer may sponsor a matching contribution of the employee's contributions up to 3% (that figure varies in some cases), or contribute a flat rate of 2% for employees who have, during that year, received at least $5000 compensation.

Employees may not make regular SIMPLE IRA account contributions. The employee limit for contributions was set for $11,500 in 2009. Previously, it was $10,500 in both 2008 and 2007, $10,000 in 2006 and 2005, $9000 in 2004, $8000 in 2003, and $7000 in 2002. Employee, meet Mr. Inflation. Oh, I see you're already acquainted.

There is a special catch-up contribution allowance for individuals over the age of 50. During 2009 and 2008 it was set to $2500. For example, this means that for an employee over 50, his actual contribution limit during 2009 would be $14,000. Other retirement plans such as the 401(k), 403(b), and 457 plans, were set to $5000 catch-up limits as of the same year.

The SIMPLE IRA can actually be funded with either an IRA or 401(k) account. However, the IRA is almost always chosen, since the lower contribution limits would be required either way, and the 401(k) has more costly administration rules. The benefits are generally on the side of choosing the IRA.

Other retirement plans, such as the traditional IRA, Roth IRA, self-directed IRA, SEP IRA, etc., cannot be rolled over into a SIMPLE IRA. The plan needs to be funded in its own account.

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