Lets Talk Money Online - A SIMPLE way to provide for your retirement

When the SIMPLE IRA plan was introduced, it was hailed as a bright new way to help business owners and their employees prepare financially for retirement. You may not hear much about these plans today, but they're still around and they still work well for many small businesses. Here's what you need to know about SIMPLE IRA plans.

One reason that companies and their employees like the SIMPLE IRA plan is because it provides lower administrative costs for the company than more complex plans. Another reason employers like SIMPLE IRAs is they're simple to set up and operate, at least when compared to some other types of retirement plans.

Remember that you, too, are an employee and can typically contribute to this plan. As a plan participant, you receive a tax deduction for the amount you contribute to the plan and potential growth is tax deferred. Your company may also receive tax deductions for certain plan costs. Most important, you and your employee have a vehicle to help prepare financially for retirement.

To open a SIMPLE IRA plan, your company needs to meet two main requirements. First, it can't have more than 100 employees. Second, you can't have another company-sponsored retirement plan, such as a 401(k) plan or Simplified Employee Pension (SEP). Meet these two criteria and you're qualified to open and run a SIMPLE IRA plan.

Opening this retirement plan is, as its name implies, simple. Most financial institutions can do this for you. You then choose one of two ways to make contributions to this plan.

Match your employees' contributions to the SIMPLE IRA plan up to 3% of compensation. This option would leave out employees who don't contribute to the plan.
Contribute 2% of individual employee compensation. The 2010 limit on annual compensation on which the 2% is based is $245,000 (indexed to inflation) to all employees. The employer makes this contribution for every employee whether or not they contribute to the plan.

In 2010 depending on compensation, employees can contribute up to $11,500 annually, plus another $2,500 if age 50 or older. Both amounts are indexed to inflation. Employees can set their contribution levels during the plan's initial election period, which must be at least 60 days long, and can change levels thereafter from November 2 through December 31. Consult your tax advisor regarding your particular situation.

One of the major reasons why companies choose a SIMPLE IRA plan for their employees' retirement needs is its reporting requirements. There are none, making administration simple in this area.

You will, however, need to provide two documents that tell your employees how the plan operates, when changes are made and how employees can take action. One document is the summary plan description, which summarizes the plan's features. Your plan's financial institution typically handles this. The other document is an election notice that employees must receive annually. This lets them know how much they can contribute and if you will match contributions.

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