Published Friday, May 20, 2016 at: 7:00 AM EDT
Do you want to set up a retirement plan for your small business? Although you have several options, one popular choice is, by name and definition, simple. It's called the Savings Incentive Match Plan for Employees—or SIMPLE.
A SIMPLE plan provides a tax-advantaged way for employees, including the owner of a business, to save for retirement. It can reduce tax liability while attracting and retaining top-notch workers. And the plan is inexpensive to start up and operate, especially when compared to some other kinds of retirement plans.
To qualify to launch a SIMPLE plan, you must meet two requirements:
1. Your business can't have more than 100 employees.
2. The company can't operate another tax-qualified retirement plan.
If your business is eligible, it's easy to get started. All you have to do is contact your financial advisor or go directly to a financial institution offering SIMPLE plans. Most employers opt for a type of SIMPLE that uses individual retirement accounts (IRAs) for its employees. Anyone who earned at least $5,000 in each of the prior two years generally will be eligible to participate.
With a SIMPLE-IRA, contributions are deposited into employees' personal IRAs, then invested according to those workers' instructions. Typically, a plan will offer a selection of mutual funds. Funds in employees' IRAs can grow on a tax-deferred basis.
The amount of employee contributions is capped by IRS rules. For 2017, the limit is $12,500, plus a catch-up contribution of $3,000 for anyone age 50 or over. (These figures are indexed annually for inflation.)
But that's not the end of the story. Your company could sweeten the deal by adding matching contributions, much as in a 401(k) plan. You can use one of the following methods for these company contributions:
You can set up your SIMPLE-IRAs for a calendar year as late as October 1 of that year. Also, unlike most other tax-qualified plans, SIMPLE-IRA plans don't have to file annual financial reports with the government.
This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.
An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.
Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
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