Simple IRA Plan

SIMPLE IRA’S are ideal for business owners with 100 or fewer workers who would like their employees to share responsibility for their own retirement savings, but who don’t want the complexity, cost and administration of a 401(k). Such businesses generally include consumer establishments such as stores and restaurants, professional firms and small companies.

SIMPLE IRA’S are also an appropriate plan for freelancers, moonlighters, contractors and individuals who work on a part-time basis. Even those who are already covered by a retirement plan at a full-time job are eligible to contribute to a SIMPLE IRA if they have self-employment income.

Key Benefits:

Very simple to administer; no discrimination testing or government reporting is required
Allows employees to make annual pretax, salary-deferral contributions of up to $11,500 or 100% of income, whichever is less, for 2009. In addition, catch-up contributions limited to $2,500 may be made by participants age 50 and over.
Individual employees can defer the maximum amount, regardless of the amounts deferred by other employees

Possible Drawbacks:

Employer contributions are mandatory and must use one of the following formulas:
A dollar-for-dollar match on salary deferrals up to 3% of compensation. This can be lowered to 1% in two out of five years.
Employer can make a nonelective contribution of 2% of compensation, regardless of whether employees choose to participate-up to compensation cap of $245,000.
Can’t be paired with other qualified plans-must be the employer’s exclusive plan
Doesn’t permit Social Security integration
All contributions are 100% immediately vested
High premature withdrawal penalty of 25% in the first two years f participation
Loans are not permitted
Annual 60-day notice must be given to all eligible employees
Overall, the maximum annual contribution that can be made to a SIMPLE IRA is low when compared to other plans-up to $13,000 for individuals 50 or older