Today we are tying together
two concepts about retirement plans for self-employed business owners. The first is how acronyms apply to federal
programs. The second to how a SIMPLE IRA
for retirement plans work.
Our title is KIS, a term
meaning KEEP IT SIMPLE. There is indeed
a retirement plan for the self-employed business owner actually called
SIMPLE. It really stands for Savings
Incentive Match Plan for Employees.
Hence SIMPLE for it easy to set up and easy to administer.
Employers can also take a
tax-deduction for their contributions to the plan. There are rules that must be followed. First, the eligible employee must have at
least $5,000 in annual income from previous year. In addition, the Employer is required to
contribute to the plan for each eligible employee in one of two ways. The first option is to match employee
contributions up to 3% of employee’s compensation. The alternative is to do a flat employee
contribution of 2% of the employee’s salary.
Each employee is
immediately 100% vested. Each employee
also has direct control over their investments.
The same rules apply to the SIMPLE IRA as other retirement plans. Contributions are TAX-DEDUCTIBLE. Earning grow TAX-DEFERRED. 10% penalty for
early withdrawal but waived for first time home buyers (up to $10,000), the
unemployed and those in medical hardships. The participant must take required
distributions at Age 70 ½.
Consequently, the SIMPLE
IRA might be the right fit for the self-employed business owner. The funding of the plan is shared by both
employer and employee, it is tax efficient and easy to administer. For further information, please contact us.