Types of Accounts: SIMPLE Explained

• SIMPLE: is the newest type of IRA. It’s very similar to a SEP, yet has many more limitations. Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) are intended for small businesses, as you may have noticed based on its title, and requires employers to match employee contributions. Well what constitutes as a small business? To qualify, the company must employ 99 or fewer employees who earn at least $5k per year. The company must also match each employee’s contribution dollar-for-dollar up to 3% of each participating employee’s salary. Companies can also make fixed contributions of 2% of each eligible employee’s salary, regardless if the employee is enrolled. Thus, unlike SEP’s, employees are encouraged to make their own contributions because employers are able to match them, but if they do choose not to pursue an IRA, employers can still make contributions on their behalf. Who doesn’t want free money!? However, like all good things, there is a catch. SIMPLE’s have stricter rules regarding early withdrawals and tax-free rollovers compared to other IRA’s. For example, if a distribution is made before the SIMPLE has been open for 2 years; a penalty of 25% will be charged to the account, unlike the 10% penalty fees seen in other IRA’s. Like SEP’s, employer's receive tax deductions for their contributions, and all contributions are immediately 100% vested.

As you can see both SEP’s & SIMPLE’s offer very similar benefits for both employers and employees. They are both designed to encourage businesses to offer retirement plans for their employees as well as facilitate the process. Next we’ll look at retirement plans provided by the government and many corporations that are available to its employees.