QandAs: Finance

What is a SIMPLE IRA?

Answer:
The SIMPLE (Savings Incentive Match Plan for

Employees) IRA was designed to assist small businesses in offering retirement plans. The SIMPLE plan is for business owners with 100 or less employees. Administrative costs for a SIMPLE IRA are usually lower than plans that are more complex.

The responsibility of funding the SIMPLE IRA belongs to both the employer and the employee. As a participant of the plan, employees are eligible to defer part of their salary and place that money into a SIMPLE IRA. This type of contribution is considered a salary reduction contribution and reduces the employee’s taxable income. These contributions are not taxed until monies are withdrawn or distributed.

Small business owners should find significant tax advantages in contributing to a SIMPLE IRA plan. One advantage for employers is that they are allowed a tax deduction for any contributions which they make to the plan. A prerequisite for this type of plan is that employers do not sponsor other types of retirement plans.